Oil could go further
23 September 2011
WEEKLY CHART
The market’s long-term chart suggests that after the completion of the rising wedge created since Feb 2009, a move back to the major supports around $40 is possible.
WEEKLY CHART
The wedge broke in June of this year.
But paused because of the support from the two Prior Highs at 87.15, and 92.58.
That band of support broke in early August.
After the initial sell-off there was a slow rally… look closer at that rally over the last six weeks…
DAILY CHART
Note the creation of another smaller wedge, formed because the rally was resisted by the horizontal from the Prior Low at 91.77.
The wedge completed three days ago.
The dramatic sell-off may find some support at the Prior Low 77.12.
But we think there may be more to come still.
FUNDAMENTALS:
The peak in the oil market was reached in April/May this year, since then it has traded steadily lower with the recent low of 75.71 made in early August.
The turning point for oil was the deepening of the Euro zone sovereign debt crisis in May, and although a deal was subsequently reached with Greece to provide funds in exchange for austerity, the debt crisis has continued to deepen.
Currently Italy, France and Spain are in the spotlight. Italy is desperately trying to implement an austerity program - at the same time as devising a plan to strengthen growth ...
Spain seems to have won a reprieve. But France, or rather the French banks, are now the main worry. Apart from a sovereign default, by Greece probably, traders are now worried a major Euro zone bank will fail and cause a domino affect within not just the Euro zone or EU, but globally.
Clearly such an event would have serious consequences for the global financial system and world economy. Many analysts forecast such an event would be more serious than the most recent financial crisis caused by the collapse of Lehman brothers.
If the global economy does slip back into recession, because policy makers both political and monetary have virtually used up all their weapons, the outlook for oil is bearish.
Today’s move lower in this market has been sharp but not dramatic, leading to a false sense of security.
Moreover, price action in oil has been closely linked to movements and sentiment in equity markets, so as stocks repeatedly tried to rally, oil found support.
We think that period of false security is fast coming to an end. Equity markets appear disappointed by yesterday’s policy announcements by the Fed. A resumption of asset purchases; “QE3” was expected, instead markets got “twist” which is a lengthening of the maturity profile of the existing portfolio.
The Fed made it clear yesterday they saw the outlook for the US economy as weak.
The Bank of England minutes released yesterday also delivered the same economic assessment of the UK economy. While still expecting CPI to hit 5% this year, they now see all the risks to growth and inflation pointing to the downside. In fact, not only did they discuss restarting QE, but they also discussed cutting Bank rate from the already low level of 0.50%.
The ECB clearly has a similar view of economic prospects as they recently abandoned their rate hiking cycle. A rate cut may not be that far off.
The global economy faces the risk of a recession that harks back to pre-WW11 experiences, worse than the one recently experienced.
If it is that bad the oil price is very expensive compared to where demand will settle. This time round even China is worried. We judge the next major move in oil is down.
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