Oil's strength
11 November 2011
TECHNICALS:
WEEKLY CHART
The oil market may be breaking out of a confusing range.
The important breakdown through the support band from Prior Highs at 87.15- 92.58 was impressive and rocked the bulls.
But the double bounce off the 75.71 level (not quite a 50% retracement of the bull run from early 2009) has achieved a Double Bottom AND broken the steep down trend resistance.
The monthly chart (not shown) will register a bull key reversal.
Now look closer….
DAILY CHART
The detail shows the impressive break back through overhead resistance (91.77-95.50) .
And the support from Prior Highs (89.69, 94.65) that characterizes well constructed bull trends has been good.
Note that the High volume break through 94.65 was a break through a 50% retracement resistance level…
DAILY CHART
This may clarify matters.
The Double Bottom completion level - which is powerful support lies beneath the market at 90.06.
In addition we can see that there is short-term support from the near Prior Highs at 94.65 and 89.69.
Minimum move implied by the Bottom - about 106….
FUNDAMENTALS:
Until recently our main concern about the oil market was the turmoil associated with the Euro zone sovereign debt crisis would slow economic growth, squash energy demand and send oil prices much lower.
However given the nature of oil, its importance to the global economy and the geopolitics of the major oil exporting region, we were always aware that the oil price could find support from on going regional animosities in the Middle East.
Apart from the Israel/Palestinian conflict, Iran has been a long term source of anxiety and after a period where concerns about her nuclear ambitions had fallen off the radar, suddenly over the last couple of weeks Iran is right back centre stage as a major geopolitical concern, not just affecting the price of oil and regional stability, but as a serious threat to world peace.
Iran has been working on the development of a nuclear industry which she claims is for peaceful purposes for some time and although many in the west including Israel have long suspected a clandestine weapons program has been running in parallel, Iran has vigorously denied this and no evidence had been found.
All this appeared to change over the last few weeks. There were fresh rumours that Israel was considering a unilateral military strike on Iran to eliminate that country’s nuclear weapons program; Israel had even tested an ISBM more than capable of hitting Iran.
Additionally the IAEA was becoming concerned that Iran had been hiding a weapons program and this week released a report through the UN to that effect.
So what does this mean for Oil. Clearly if Israel launched an attack, whether successful or not, Iran would use all means to retaliate.
That would likely be an air strike on Israeli cities and the activation of terrorist cells globally to cause as much damage and mayhem as possible, but the main weapon is of course oil.
This could be deployed in several ways:
Obviously any combination of these and the associated rise in tension would send oil prices sky high.
Is any of this likely to happen?
With Iran much closer to building a nuclear weapon than any intelligence organization had previously thought, the window to act is closing. Moreover sanctions haven’t worked.
If Israel feels she can knock out Iran’s facilities and handle the almost certain retaliation, then there is a high probability that she could act; she has before, most recently atacking a suspected nuclear site in Syria.
So while we still see the Euro zone sovereign debt crisis having a major negative affect on the global economy, it is no longer economics driving oil, but geopolitical tension; don’t be short!
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Initial USD/JPY Bounce Resisted by 38.2%