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Oil bulls sense another leg to the trend

27 June 2008

The Macro Trader’s view:

Over recent weeks the oil market has hit new highs on two occasions - only to slip back into a consolidation pattern. This began to suggest to some that maybe the Bull Run was coming to an end.

Because many commentators and politicians, not to mention the odd analyst, described the market’s behaviour as typical of a bubble, traders paused and looked for reasons to sell.

But the market has shown great resilience in the face of several developments that were expected to send it lower:

- The Fed Chairman began talking tough on inflation and the weak Dollar, giving rise to the view that interest rates might soon rise, and
- Saudi Arabia announced two output increases, independently of OPEC.

A weak Dollar has been a significant factor behind the rally in oil as the commodity is paid for in Dollars. As the Dollar weakened, so the oil-exporting countries received a devalued payment for their exports, incentivizing the producing countries to drive prices higher.

Note that Following Bernanke’s remarks the Dollar strengthened, and that coincided with a correction in the oil price.

This proved short-lived, the Fed has back-peddled on hiking rates and at this week’s FOMC meeting focused on inflation as the main threat. Nonetheless the Fed left rates unchanged without giving many clues about when they might change. This helped the oil market recover as the Dollar failed to recover further.

The most important development though has been the Saudi output hike. Potentially weakening, this had no discernable impact, indeed the market made a new high the next day.

Now the oil market looks set to extend its rally, as the Dollar comes under fresh selling pressure, and there is little prospect of another output hike anytime soon.

Clearly oil isn’t a bubble market; the oil price is reacting to perceptions of supply and demand, both current and future.
As the economies of India and China continue to expand, oil demand increases, and those two economies are expected to grow even further, which means current oil supplies will be placed under even greater strain unless fresh reserves are discovered or alternative energy sources developed on a viable commercial scale.

In our opinion the oil market is driven by supply and demand and geopolitical tensions which remain very real, especially between Israel and Iran as Israel threatens to militarily stop Iran’s nuclear program if it doesn’t agree to halt activities that the West sees as a cover for developing nuclear weapons.

In short, there is only one direction for the oil price: up.

The Technical Trader’s view:

Here’s a fierce bull market.

The long-term trigger was a break up through the $40 level.


The market has been pausing and moving sideways –but now looks to have broken out.

A close above both 139.45 and 140.61 would be a powerful confirmation of the bulls’ position.

Note that volumes have been good.

Mark Sturdy
John Lewis
Seven Days Ahead

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