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Production Cut Monday

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Monday is the first trading day of the month and the OPEC production cuts were supposed to kick in on Saturday. Only a fool would actually expect OPEC production to have dropped by 1.5 mbpd on Saturday. However, there are some strong signs that we could be seeing some production declines as the week continues.

The tanker trackers will have their hands full trying to calculate how much oil is leaving each port and for what destination. We can expect some decline from Saudi Arabia but the rest of the OPEC countries will probably need more persuading by OPEC officials before actually cutting production. Kuwait did take the step of notifying customers in Asia they would be getting -5% less oil in November and Iran warned France's Total of an oil sales cut. Nigeria and the UAE also notified buyers of a possible decline.

Crude oil is up overnight and holding just over $68 at 3:AM Monday morning. This small gain came on the back of some strong gains in the Asian markets. If bullish sentiment is going to break out then energy stocks and crude futures should also benefit. The ECB, Bank of England and the Reserve Bank of Australia are set to lower rates sharply to head off a recession.

The positive close by the U.S. markets on Friday and the potential for coordinated global rate cuts pushed the Asian markets higher on Monday with the Hang Seng up +3% and the Australian ASX200 was up more than 5%. India rose +4.6% after a central bank cut interest rates and injected $8 billion into the financial system.

The U.S. futures are up slightly but the U.S. markets are going to be faced with a huge overbought condition at the open. The major U.S. indexes were up +11% for the week and ended close to their highs for the week on window dressing for the major fund families. Mutual funds controlling more than 75% of the invested assets in the U.S. had their fiscal year end on Friday. They dumped stocks the prior two weeks then pushed selected stocks higher on Thr/Fri to make their year-end statement look good. Many of those funds may want to sell some of those positions and go back to cash in case we are going to retest the lows once again. This makes Monday a critical day for market direction.

We are also facing a major economic report in the Institute for Supply Management report on Monday. Expectations are for a sharp drop but based on the recent regional reports I fear it could be worse than analysts expect. This is a critical report for judging the GDP for the 4th quarter. The GDP for Q3 was released last week at -0.3% but analysts are expecting deep revisions over coming weeks. That will also give us a clue to what the Q4 GDP might look line. On Friday we will get the U.S. non-Farm payroll numbers and expectations are for a loss of 175,000 jobs. The recent regional economic reports are projecting a deep recession in progress and the number of job losses equivalent to what the regional economics are showing is a loss of 350,000 jobs. There is definitely a possibility for a large negative surprise. All of these factors will impact energy prices as will market sentiment.

Jim Brown

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