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Trading Oil lower

11 September 2008

The oil market peaked back in July of this year, and since making an all time high, oil has steadily corrected lower, so much so that OPEC recently trimmed its output in an attempt to halt the decline.

So after such a relentless rally in the 1st seven months of this year, why has the market corrected so far and can it go further, or are the conditions which drove the oil price to such lofty levels, still in play?

Almost as soon as oil made its all time high concerns over the global economy began to intensify, and over the last two months Germany and the Euro zone have reported negative Q2 GDP while UK Q2 GDP was last reported flat.

Moreover the outlook for these economies has turned steadily more pessimistic and several forecasters, including the EU now predict recession for the UK, Germany and Spain with other leading EU economies not fairing very much better.

Even Japan is having a difficult time, but what of the US; Q2 GDP came in recently in excess of 3.0% on an annualized basis, so all looks well there?

But upon closer inspection it isn’t; most analysts suspect that the strength seen in Q2 was driven by the tax rebate cheques, which were a one off, and as unemployment has continued to rise with the unemployment rate hitting 6.1% earlier this month, a large question mark remains over the health of the US economy, with even the Fed continuing to warn of serious downside risks to growth.

Especially in the financial sector which continues to struggle and seems far from normality, with the US Government stepping in to rescue Freddie Mac and Fannie Mae in recent weeks and Lehman brothers continuing to post losses which has place its future in some doubt.

Indeed all the major economies are looking weak, as the fallout from the credit crisis continues to work through the global financial system, with Central Banks doing their best to provide liquidity, but unable to cut interest rates due to inflationary pressures caused by the earlier rally in oil.

But at last the oil price is correcting lower in response to the economic weakness it didn’t start but has greatly aggravated, and unless the leading economies manage to miraculously pull themselves out of their current malaise, we see little that can support the oil price moving forward.

So do the conditions still exist that drove oil to its recent all time highs; no.

Can the price decline further; yes.

But as ever timing is the key.

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Is Short Sterling a buy? 4th September 2008

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