8th January - Oil is at a crucial level
11 January 2016
TECHNICALS:
The market is driving down through the critical band of support drawn from the Prior Low at 39.42 and 35.94.
A monthly close beneath that band would create a massive Double Top – and fresh selling would enter the market.
WEEKLY CHART
This might be the catalyst for the bears.
Here is a Continuation Triangle on the point of completion.
This week’s close is either on or slightly beneath the lower diagonal of the triangle.
Note that a completion of the Triangle will coincide with a clear smashing of the long-term band of support from 2000.
The existence of both these chart structures suggests that further falls in price will lead to fresh selling. The minimum likely move is down as far as $15 (measured from the Triangle)
FUNDAMENTALS:
The Oil market has been weak for some time, driven by several factors:
These are key fundamental factors and ordinarily the Saudi’s would back an OPEC production cut to bring supply and demand back into balance and at least steady the oil price, but this time they have refused; why?
The original reason for the Saudi output stance was their desire to force shale oil and gas producers out of business. When oil prices were closer to the $60 - $80 a barrel price range, shale energy production was profitable and had briefly seen the US emerge as the worlds leading oil producer.
This development raised alarm bells among OPEC members, but especially in Saudi Arabia whose wealth is built on oil exports. They feared if alternative sources of oil/gas were developed, not just in the US but in many other countries, not only would Saudi oil revenues be hit, but so too would their position as the world’s major oil exporting nation. And, just as importantly, their strategic relevance to the US.
By keeping output unchanged the Saudis successfully drove the price of oil down to a level where shale energy production became uneconomic, and drove many producers out of business.
At a recent OPEC meeting Saudi Arabia made it clear she was not prepared to cut her output, wanting to insure she maintained her position as the leading oil-producing nation.
But now there is a new dynamic in the market: Iran. After several years of being prevented by economic sanctions from exporting her oil as a punishment for pursuing what the major powers feared was a military nuclear program, Iran has agreed terms with the major powers to limit her nuclear work to purely civilian activity that can be verified.
As a direct result economic sanctions are being lifted and Iran allowed to restart oil exports. Iran has very large reserves and unless other OPEC members are prepared to scale back their own production, Iran’s oil will be hitting an already over-supplied market.
In addition, in recent days, a fresh development has hit oil prices. Saudi Arabia executed a Shia cleric which has out raged Iran. The two countries already had strained relations and this act has made them a whole lot worse. But instead of driving oil prices higher on geopolitical risk concerns the oil price has dropped. Why?
The deteriorating relations between Saudi Arabia and Iran, which took a fresh hit when a mob burned down the Saudi embassy in Tehran, means both sides are determined to produce as much oil as they can to damage the other side.
Iran needs to restore her oil exports to pre-sanctions levels to generate foreign income to rebuild the economy and infrastructure and Saudi Arabia is determined to maintain market dominance, the result is oil prices will trade lower, much lower we think, than even current levels.
Not until OPEC can rediscover its will to act as one will the oil price steady and eventually rise and that doesn’t look set to happen any time soon.
Next story:
14th January - Gilts may go further 
Previous story:
The Ftse is ripe for a big move