20th September - Has economic reality hit Oil?
25 September 2012
TECHNICALS:
WEEKLY CHART
The market’s failure at the rising diagonal and the Fibonacci resistance is notable.
DAILY CHART
The day chart reveals the double failure at 98.18.
And then the breakdown through the support from Prior Highs 94.08 and 95.61.
There is good overhead resistance now.
The pressure is on the bulls.
FUNDAMENTALS:
After a spring sell-off, driven by fears of an imminent break up of the Euro zone and the consequences that held for the global economy, the market bottomed in June as new ECB President Draghi promised to do what ever it took to save the Euro.
And although the Eurozone economy was slowing and probably already in recession by then, and China’s economy was showing signs of stress too, the market took comfort from Draghi’s comments and oil traders turned their attention away from economic woes to the tensions in the Middle East and a rally began.
However that rally now seems to have reversed. Why?
The US economy, on a slow but steady recovery, had provided a degree of confidence that the world’s biggest economy was capable of riding out the Euro zone debt crisis. But over recent months data has cooled. So much so, that the Fed changed its assessment of the economy’s health and recently started QE3 in an effort to halt the slide towards recession and restore growth. Unemployment was seen as the main obstacle to a self sustaining economic recovery.
So swift was the Fed’s change of focus that it took markets including oil by surprise. Although the tension in the Middle East remains( and if anything has increased over recent days) the oil market struggles to find support.
Add in the tension between China and Japan over a Sovereignty dispute concerning a chain of uninhabited Islands in the South China sea. That saw widespread civil unrest and protests in China against Japan that forced many China-based Japanese companies to close.
Moreover, in recent days Saudi Arabia has offered to increase her Oil production in an effort to limit the rise of the oil price which could not only damage the global economy, but back fire on the OPEC oil producers too.
In an environment where civil unrest and revolution has swept through many Muslim and Arab countries this year, the ruling elite of Saudi Arabia et al can not afford to see a weaker global economy suppress energy demand and drive down the oil price making it difficult to buy internal peace.
So what is the outlook for oil?
The positives are:
The negatives are:
Although an argument can be made that oil is merely stuck in a wide range, we judge that economic reality could yet trump geopolitical tension and weaken this market further.
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26th Sep - Copper Stays Within Key Bounds 
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20th Sep - Silver Recovery Reaches Dual Fibonacci Resistance