12th September - Why is Oil so strong?
26 September 2016
TECHNICALS:
Monthly Oil chart
The long-term support of the S&P comes directly from the Prior High in 2000 at 35.94.
The market tried to drive beneath that level in 2015 and was never able to close beneath it…
WEEKLY Oil Chart
Having failed to sustain a monthly close beneath that level 35.94, the market has consolidated above it.
In so doing, the sideways price action has formed a possible H&S reversal base formation .
If the market were able to get back above 53 (a possible Neckline) the pattern would be complete, and then (though this is conjecture at the moment) a measured move to about 75 would be on the cards…
FUNDAMENTALS:
The oil market has remained remarkably well-supported throughout much of 2016. After the lows reached back in January, the market has remained in a broad trading range between 40.00 to 54.00 Dollars.
But what is supporting the market?
And why isn’t it weaker given the array of global economic weakness?
On several occasions OPEC has voiced a desire to reduce oil production in an attempt to stabilise the market. Russia too, has on more than one occasion, tried to court OPEC producers in an attempt to shore up oil prices. But on almost every occasion Saudi Arabia has resisted.
One of the key reasons was the shale oil boom in the US which was set to make the US the world’s largest producer. Saudi Arabia saw and feared a threat looming to her long run dominance of the World’s oil producers and when oil prices began to fall, the Saudi policy was to let free fall, but why?
Shale oil is expensive to produce compared to other more conventional forms of extraction, so the logic was, if the oil price falls far enough, for long enough, then US Shale producers would go out of business and the price could begin to rise, but the plan hasn’t quite worked.
The global economy is still underperforming, this combined with the Saudi “keep pumping” plan has led to a global glut on the oil market and not just in unrefined products, but refined products too, but crucially, shale production in the US hasn’t gone bust.
Add in Iran’s re-integration in the oil market with her target of raising output up to pre-sanctions levels and there is a clear limit to how far the oil price can rally.
But why aren’t the bears back, taking the price back down towards $30?
Firstly, the US economy is still under-performing despite some Fed officials wanting to see another small rate hike. Just look at the most recent ISM surveys and non-farm payroll - all of them are much weaker than expected.
Secondly, Japan ‘s economy continues to underperform, which was the reason why the Bank of Japan’s Governor pledged at last weekend’s G20 meeting to keep easing.
Thirdly, China too is recording weaker than expected growth rates. Added to which, (fifthly and sixthly), we know that Russia is in a pickle and Brazil a complete mess.
But lastly, there is the Eurozone. An economy of comparable size to the US, but serially under-performing over several years despite negative interest rates and a very active QE program.
So again, what is supporting the Oil market? In a nutshell: sentiment.
Oil traders are constantly alert to any fresh move from OPEC/Russia/Saudi Arabia designed to support the market. Every time a rumour starts that OPEC is to have an emergency meeting, the price ticks up. But nothing is ever agreed: Iran will not cut, the rest of OPEC cheat on their quotas and Russia just wants to raise cash as sanctions, imposed over aggression in Eastern Europe, bite.
In summary, we are bearish of oil, but when it will finally succumb to gravity and sell off isn’t quite clear. But don’t go long!
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16th September - The S&P, the US Economy and Trump 
Previous story:
2nd September - The growing strength of Sterling