Friday I Noted the Drop in Oil is Not Only Threatening the Existence of Companies, but Also of Countries.

Friday I noted the drop in oil is not only threatening the existence of companies but also of countries.  Perhaps the countries that are facing the gravest threat are Libya, Iran, Iraq, Nigeria, Venezuela, and Russia.  Will there be unrest that leads to anarchy that leads to regime change and curtailed production?  Will the Arab Spring be nothing as compared to a potential Arab Winter?

Wild thought?  The countries mentioned above debt and currencies are under attack given the multipolarity and interdependency of financial markets.  As most know a basic cause for domestic unrest is economic woes.

Regarding the interruption of supplies, Libya’s production dropped last month by 248,300 a day to 638,000 the result of its largest oil field being seized by purported ISIS gunmen.

According to OPEC, OPEC estimates 2015 global demand for its product is 28.9 million barrels per day.  Current reported production is about 30 million.  What will happen to the supply demand equation if two of the above countries go off line?

According to the International Energy Agency a drop in 1 million barrels in production can easily occur if unrest in any two of the above countries experience considerable civil unrest.

The drop in oil is also impacting the economies of the generally fiscally conservative countries such as Norway.  According to Bloomberg, Norway’s cost of production is $70/barrel and according to wire reports S & P may place its AAA rating under review/developing given the drop in crude.  Norway is one of the nine remaining AAA rated countries.

Wow!

This week the Federal Reserve holds its final meeting of 2014.  What comments will the Committee make about crude and its impact upon the domestic and global economies?  As noted several times, a number of Fed officials have commented about the positive impact to growth that this drop may have upon the economies of the US, Europe and Japan.

Will the term “considerable period” be dropped in its post meeting statement?  If so how will the markets respond?

As noted many times, the averages typically decline about 10% to 12% when the FOMC alters monetary policy.  History then states in the seven tightening moves since 1970, the S & P is about 11% higher following its first interest rate hike.

To write the incredibly obvious, this week’s market action will be dictated by oil prices and the outcome of the Fed meeting.  Other data released are various housing statistics, several manufacturing data points and regional manufacturing surveys and weekly jobless claims.

Commenting briefly about Friday’s market action, equities sold off on oil and treasuries rallied.

Last night the foreign markets were mixed.  London was up 0.31%, Paris up 0.44% and Frankfurt up 0.34%.  Japan was down 1.57% and Hang Sang down 0.95%.

The Dow should open moderately lower following one of the worst weeks in about five years. The 10-year is off 13/32 to yield 2.12%.

kent
The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. 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. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.