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6th November - Could Oil go lower?

09 November 2015

TECHNICALS:

Nymex Light Crude Monthly continuation chart

The market has plummeted to a familiar level for chartists – around 37.80 – which has been good support in the past –notably in the massive sell-off of 2008.

The significance and integrity of that level arises from it’s clear origins in the Prior Highs established in 2000 and 2003.

So technicians are looking for massive support to be found should the market drift from current levels.

Look closer.

Nymex Light Crude Dec 15 Daily chart

Short-term, there is no doubt that the market has found good resistance at the short-term Prior Lows at $53 – having tried not once, but twice, to break up through that level.

So the short-term market looks likely to retest the long-term support of 37.80 – just below the short-term prior low of 39.55.

FUNDAMENTALS:

The sell-off in the oil market over recent months appears to have stalled. Indeed, there are some who are making a case for a recovery in the price, but why?

Part of the reason is linked to historic performance. The argument goes something like; the oil price only dropped as low as approximately $38.00 when the financial crisis was at its worst, why then should it make new lows after several years of economic recovery?

When the financial crisis hit, it mainly affected the developed economies; the US, UK, Eurozone and Japan. The large emerging economies of China, Russia, Brazil and India, were more or less unaffected, indeed they were largely responsible for shoring up World growth.

Moreover, they also drove the boom in commodity prices, especially China, which as the World’s second-largest economy and manufacturing workshop had an enormous appetite for copper, iron, oil and just about every other commodity involved in manufacturing processes.

They had such a big impact in commodity markets, that Africa was being seen as the next big investment opportunity.

But more recently as the UK, US and in part, Japan saw their economies recover, the so-called BRIC’s have suffered their own slowdown. In the case of Russia and Brazil, there has been an outright recession. And even though China continues to post GDP numbers of 6.9%, that is like a recession for that country.

The result has been a general collapse in commodity prices. In the UK steel workers are losing their jobs and in the US the aluminium industry is at risk of extinction from cheap Chinese imports.

In the oil market, supply and demand remains out of balance. As China’s economy has cooled so too has her energy demand. In addition, Saudi Arabia has refused to cut her own output. This is for two reasons:

Saudi Arabia/OPEC wants to weaken the challenge from US Shale production by rendering the process un-economic
Saudi Arabia wants to maintain her position as the dominant player in the oil market.

Furthermore, Iran’s recent agreement with the major powers will lead to sanctions being lifted and her oil once again flowing back to market.

If oil supply already exceeds demand and a production cut is off the table, how much bigger will that glut be when Iran is back to full production?

Additionally, the Eurozone continues to underperform. The ECB has said it will extend its own QE program and this week German industrial production fell well short of consensus, perhaps as a result of the VW emissions scandal.

In the US the Fed looks set to begin hiking rates even though there is no compelling need. If they miscalculate and stall that recovery, which has been at best moderate for much of this year, oil demand can only fall.

We judge the outlook for the oil price in the medium and long term is negative and worsening so a price below $30 looks possible

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13th November - Gold is vulnerable

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25th October - The Euro bears take charge

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