Has Oil Found a Bottom?

Oil climbed about $2 on Friday to about $56 barrel on perhaps short covering and perhaps from the closing out of option positions.  Has oil found a bottom?

Iran and Saudi Arabia are reportedly at odds as Iran commented that a “political conspiracy going to extremes” is to blame for the dramatic slump which could signal that Iran—who voted to keep production at current levels—will try to exert pressure on OPEC to cut production

Venezuela is already begging OPEC for a production cut.

As widely noted because 45% of Russia’s economy is oil related, Russia is facing extreme financial pressures.  Russia is also deemed persona non grata by Saudi Arabia and other Gulf states because of its relationship with Syria.  Moreover it is reported Russia is supplying Iran with nuclear materials and know how.

Saudi Arabia is adamantly against Iran obtaining “the bomb” and a closer relationship between Iran and Iraq.

It is reported that some influential figures on the fringe of OPEC have suggested some of its key members to meet with non OPEC producers such as Russia, Norway and Mexico, to discuss a cut to stabilize prices and economies.  Will this occur?

Many times I have opined “things are often not as they appear.”  The popular narrative is that Saudi Arabia is attempting to bankrupt American shale producers, a narrative that I rhetorically and conjecturally did not believe.  I always thought Saudi Arabia’s intent was similar to the “conspiracy theory” as proposed by Iran perhaps amplified by fear of ISIS.

According to the International Energy Agency (IEA), the difference between the world being over supplied and undersupplied with  oil is around 1.2 million barrels.  The IEA writes Nigeria’s production is about 1.8 million, a country whose oil production is threatened by Boko Haram.  Libya’s production is about 600,000 barrels down from approximately 900,000 barrels because of ISIS.    What happens to the supply demand equation if both countries ascend into chaos and anarchy that curtails production, a scenario I don’t think is outlandish?

Since 1990 there have been about five oil shocks, each of which the price of crude plummeted about 45% in six months.  Six months later crude had retraced about 50% of the drop and 12 months later, oil is up about 80%-85%.  Will history be again repeated?

Commenting on Friday’s market activity, all markets were quiet after seven consecutive volatile sessions.

What will happen this holiday shortened week?  The economic calendar is crowded with the final revision of third quarter GDP, several manufacturing statistics, a number of housing data points, a confidence survey and of course jobless claims.

Last night the foreign markets were up.  London was up 0.81%, Paris up 0.76% and Frankfurt up 1.03%.  Japan was up 0.08% and Hang Sang up 1.26%.

The Dow should open quietly higher.  The 10-year is off 3/32 to yield 2.18%.

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.