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What are the Odds the Saudi’s Cut Oil Production to Boost its Depleted Finances?

Will there be a nuclear deal with Shia Iran?  It was reported late Friday by various news wires Sunni Saudi Arabia may seek to buy or build a nuclear weapon, perhaps from Pakistan.  I will vigorously argue this is the result of American foreign policy, a policy that has created a vacuum in the Middle East.

As I noted Friday, there has been a bitter rivalry between the Sunnis and Shias for over 1200 years, a rivalry which at times has been extremely violent with the Shias calling for the total domination of the Sunnis.

It is largely accepted the US has abandoned 70 years of Middle East policy, naively believing such will improve America’s reputation in this volatile region.

Most political scientists will agree the current crisis in Yemen is really a proxy war between Saudi Arabia and Iran for regional domination.

Speaking of which the Pentagon confirmed the Yemini insurgents control sophisticated missiles capable of targeting ships in the narrow straights of the Gulf, Saudi Arabian oil fields and cities.  It was also reported Egyptian and Saudi Arabian war ships have entered strategic areas, an area where 3.8 million barrels are shipped daily.

What does the above have to do with the markets?  Everything.  Fifty percent of the world’s oil is produced in the Middle East.  Twenty five percent of America’s needs are supplied from this volatile region.

The oil narrative is still immensely bearish with only some “nut bags” discussing the possibilities of supply disruptions.

All missed the oil decline, perhaps a reason for today’s overwhelmingly bearish narrative.

I have opined several times the most obvious conclusions are the ones most often ignored.  If there is a supply disruption, will the pundits state that such was inevitable?

I now ask the question what are the odds the Saudi’s cut production to boost its depleted finances.  Economic warfare in hopes of bankrupting Iran or Russia did not work.  Building a nuclear arsenal is expensive.

Radical thought?  Always expect the unexpected.

As noted above, the current narrative is all about excess oil supply, a change in monetary policy, the impact of the dollar on the multinational profits, and QE.  I will write all are market significant but have been debated/discussed for eons.

Change is the only constant and I believe we as market participant must always expect the unexpected, events that by definition catch everyone by surprise.

This week can be of significance.  The economic calendar is heavy and includes the all-inclusive labor report.  Moreover equity markets are closed Friday for Good Friday but the bond market is open.

I vividly recall in the early 1990s when the monetary and employment environment was similar to today and the jobs data was released on Good Friday.  The term used the following Monday “The bond market was/is puking bonds” a puking that continued for the remainder of the week but the vast majority of the damage occurred on Good Friday.  Trading staffs were thinned because of the holiday.

I have commented many times the bond market is illiquid, partially the result of regulatory changes mandated by Dodd Frank.  What happens to prices if Friday’s data surprises on the upside?  Next Monday can be ugly.

Commenting about Friday’s market activity, all markets were relatively quiet.  Oil fell for the first time in six.  FRB Chari Yellen’s remarks were similar to previous remarks.  Treasuries rallied moderately as 4Q GDP was revised up less than expected.

Last night the foreign markets were up.  London was up 0.38%, Paris up 1.08% and Frankfurt up 1.42%.  Japan was up 0.65% and Hang Sang up 1.51%.

The Dow should open quietly higher on optimism that the global central banks will continue its very accommodative stance.  The 10-year is unchanged at 1.96% yield.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.