OPEC PRODUCTION CUT—THE FIRST IN EIGHT YEARS

Oil surged over 9% as OPEC cut production for the first time in eight years, a production cut in some estimates that was greater than anticipated.  Oil gained further momentum as inventories declined for the second consecutive week versus rising.  East coast inventories are at the lowest levels since July 2015.  I rhetorically ask what happens if the northeast experiences a cold winter?

It was also announced that OPEC will meet next week with non OPEC members to discuss a production cut.  Some think there will be further reductions.

Is the perfect oil storm materializing?  Growth is accelerating, evidenced by the larger than expected increase in the ADP Private Sector Employment Survey.  Will tomorrow’s BLS report confirm the strength in the ADP report?

Will growth be greater than expected that will stimulate greater oil demand while supplies are contracting?  Contrary to popular opinion, production cannot be ramped up in a moment’s notice.  For large upstream projects, the time lag is 2 to 3 years.

Many times I have compared 2014-2016 to that of 1998-2002.  The similarities to date are uncanny.  Will oil now double from current levels just as they did in the previous era?

Treasuries are getting killed, experiencing their worst month since 2009.  The stated reason for the decimation is speculation of increased growth under a Trump administration.  The yield on the 10 year Treasury rose by 23 basis points in October and 55 basis points in November.

Ouch!

Yesterday I thought it was significant that Treasury Secretary nominee Mnuchin stated he was open to exploring issuing debt with maturities greater than 30 years as shorter dated debt matures.  Is government finally doing what most businesses do when interest rates are at historic lows?  Extend all short duration debt to the greatest possible maturity?  Wow!  That would be a first.

Treasuries were also hurt on oil’s rise.  Will such increase inflationary expectations?

Commenting about equities, the NASDAQ declined about 1% as technology valuation questions arose with rising interest rates.  Energy and the financials managed a breakeven day for the Dow.

Last night the foreign markets were mixed.  London was down 1.11%, Paris down 0.64% and Frankfurt down 0.92%.  China was up 0.72%, Japan up 1.12%and Hang Sang up 0.39%.

The Dow should open quietly lower.  Will the Italian referendum now begin weighing upon the markets?    Oil is up another 2% to over $50 barrel.   The 10-year is off 8/32 to yield 2.42%.

 

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.
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