4th July - Oil: its not a spike but a bull market
08 July 2013
TECHNICALS:
Oil MONTHLY CONTINUATION CHART
The market has pushed above the Prior High Pivot 100.42.
Simultaneously, the market has smashed up through the falling diagonal from 2008.
Both will act as good support on any pull-back.
Oil Aug 13 CHART
The market has broken out of the trading range since August 2012.
There are multiple supports beneath the market on any weakness.
FUNDAMENTALS:
The oil market has proved very resistant to the downside over recent months, despite several attempts to go lower. What looks clear to us is the link between oil and stocks.
Looking ahead, the US economy is in recovery mode, but the pace of recovery is slow. The Fed’s forecast is for the pace to pick up and for current low levels of inflation to prove transitory, rather than being on a downward path to deflation.
That analysis has led the Fed to begin thinking about constructing an exit strategy from their very considerable monetary stimulus. The recent FOMC meeting saw the Fed prime the markets for a winding down of their current bond buying program, likely to start later this year.
While this is not a tightening, it is a withdrawal of expected extra stimulus and the markets, especially stocks and bonds have registered their disappointment. But we think traders/investors will overcome any anxiety about the Fed if the economic recovery quickens. And it will need to for the Fed to implement its policy of tapering.
So in a sense, traders almost have a floor under equity markets and thereby the oil market: Faster economic growth will drive both stocks and oil higher, slower economic growth will keep the Fed in the game and may force additional easing, this too will support stocks and thereby oil.
Add in the continued geopolitical risk of the Middle East, which has now broadened to include Egypt and oil looks very well supported.
In our view, the situation in Egypt is unlikely to develop into another Syria because Egypt is a secular state and the Army seems to act as a guarantor of that position as evidenced by the ousting of the Islamist president and suspension of his Islamist-oriented constitution.
In Syria the Army is loyal to the president, so there is no power other than a rag tag bunch of rebels to oust an increasingly unpopular president.
We sense the Egypt crisis will pass, as the Army there is intent on holding fresh elections and they are likely to do so within the framework of a secular rather than theocratic state framework.
But what of the Oil price? Although China is currently a cause for concern, with its economy currently experiencing a slowdown, the US economy is growing and the pace will likely quicken throughout this year as the affects of the “fiscal cliff” wash through and the economy adjusts.
In the Euro zone, a recovery looks possible and only the debt crisis offers a potential obstacle. In Japan the recovery there looks like becoming dynamic as domestic demand shows signs of life and exports of manufactured goods pick up and in the UK, the economy is showing signs of sustainable recovery.
This means demand for oil will increase and although the US has its shale resource, a vibrant US economy will no doubt drag China out of the doldrums and the Euro zone out of recession, meaning oil could be a buy and hold asset.
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11th Jul - Copper Challenging Next Long Term Supports 
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05th Jul - USD/ZAR Upmove Temporarily Paused