25th April - Is Oil vulnerable or resilient?
29 April 2013
TECHNICALS:
WEEKLY CHART
The market completed a continuation Triangle.
The initial breakout has been followed ( as is often the case) by a rally to the point of completion.
But the diagonal (at 92.20) should now be good resistance.
Note too the minimum target for the bear move implied by the continuation Triangle: 70.
DAILY CHART
This is interesting and adds considerably to the bear case.
Note the rally is faltering at the combined resistance at the triangle’s lower boundary and a 50% Fibonacci retracement resistance.
That is a powerful combination and the market’s hesitation at that level is clear.
We are sellers here: the market is vulnerable.
FUNDAMENTALS:
The oil market has shown amazing resilience against a global economic environment that still leans more towards recession than strong growth. Almost five years after the financial crisis first hit, the world’s leading economies are still trying to find the right formulae to return their economies to solid growth.
In the Euro zone the sovereign debt crisis seems endless, with Italy struggling to form a government, Portugal having to re-jig its austerity program, Cyprus forced to rob it’s depositors, Greece forced shrink its public sector and Spain saddled with cripplingly high unemployment.
In the US, growth is still not assured. Until early this year the US economy looked finally to be moving towards a self-sustaining recovery fuelled by a loose monetary policy response unheard of in US history. But that suddenly came into question when the enforced tax increases and spending cuts of the so called “sequestration” kicked in and data began to show renewed weakness.
Then there is Japan. An economy mired in 20 years of deflation with an economic underperformance to match. The recently elected government and new governor of the Bank of Japan are implementing aggressive pro growth policies but a turn around won’t occur overnight.
However, there is always China. The economy tipped to over take the US in the first part of this century. But she too is experiencing slowing manufacturing and growth rates lower than we are used to seeing.
So what keeps the oil price afloat?.
The familiar argument until recently was that the world had reached or even passed peak oil, but the shale oil/gas boom taking place in the US argues differently. In other places too, shale gas is seen as a new source yet to be tapped in Russia, China, the UK and elsewhere. So traditional sources of oil are no longer the only game in town. And even in mature oil fields like the UK’s North Sea, new significant finds have been made.
One cannot even point the finger at OPEC and accuse them of cutting production to maintain prices as in the past.
We think the oil price is behaving similarly to equity markets.
Although economic activity remains sub-par, traders/investors in equity markets are positioning for a return to economic growth. They see the massive stimulus offered by the Fed, Bank of England, Bank of Japan and ECB, albeit through generous loans rather than outright QE, as ultimately driving the world’s economies out of recession and back towards more familiar growth rates.
The oil market is behaving that way too. This can be seen each time equity markets correct lower, the oil price retraces too. When growth does return, demand for oil will be at a much higher level than even five years ago before the financial crisis recession hit. Remember how much the economies of China, India and even Brazil have expanded since then and, accordingly, how much more the energy those economies require and will demand in the future.
For now we judge oil is likely in a broad trading range of 85.00 – 100.00 but that wont hold for ever - just watch equity markets for clues on where oil goes next.
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01st May - Cotton Recovery Sees Temporary Momentum Loss 
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25th Apr - NZD/USD Briefly Spikes Through 76.4% Resistance