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17th November - Oil, fundamental obstacles in the way of bullish charts

20 November 2017

TECHNICALS:

 

MONTHLY CHART

The oil market is characterized by two dominating features:

1.The solidity of the support (just beneath $40) from the Prior High in 2000. The market has already shown the strength of that level in the bounce in 2008.
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2.The completed H&S reversal over the years 2014-2017.

WEEKLY CHART

The detail of that H&S pattern is clear: the break up through the neckline, the push through the Prior High at 55.24.

Watch carefully to see if 55.24, a prior High support, is strong enough to re-energise the bulls into beginning the next leg higher.

Minimum target? About $100.

(which is where the market spent the years 2010-2014! It is a long-established area of congestion.)

Only a failure back through the neckline currently beneath the market at $51.5 would change this bull outlook.

FUNDAMENTALS:

Until recently the rally in oil, that began in the middle of June looked set to extend much further, because Saudi Arabia and Russia both called for an extension to the output production cut introduced earlier in the year by OPEC and Russia, designed to end the oil supply glut.

There was additional support derived from uncertainty caused by Saudi Arabia’s internal crackdown on corruption.

Add in the on going tension between Saudi Arabia and Iran, the struggle to defeat ISIS and more recently Lebanon after the Lebanese Prime minister unexpectedly resigned while visiting Saudi Arabia and an oil  price range of US$60- $80 was coming into view.

But the rally has halted.  Is it just a correction, or a potential change of direction?

In recent days China has reported weaker growth, as the worlds 2nd largest economy that means a reduction in demand for many commodities, but specifically energy. But with the US economy recording solid GDP growth rates of 3% annualised, Japan enjoying it s longest sustained economic expansion in several years and the Euro zone economy too growing solidly at 2.5% year on year China’s relative slowdown doesn’t fully explain the sudden halt to the oil market rally.

Some other dynamic is at work ...

The IEA has in the last few days issued a report forecasting a large and sustained increase in US gas and Oil production which is expected to place the US as the largest energy producer for decades to come.

The shale resources being tapped by the US is seen as outstripping both Russia’s giant Siberian field and Saudi Arabia’s new large oil field.

Clearly the US will not be dancing to the old OPEC tune. In the past OPEC, led by Saudi Arabia and more recently joined by Russia, have sought to control the oil price by manipulating production. Not so many years ago oil was trading at  $100.

The Saudi authorities, had adopted a policy of trying to drive US shale producers out of business by flooding the market and driving the oil price down beneath the costs of shale production. But US innovation has recently driven shale production costs down. So Saudi Arabia’s current policy  is to maximise profit  by trying to drive the price back up through cutting production.

But in this new era of plentiful US oil and Gas production Saudi Arabia/OPEC and Russia would need to cut very deep into their own output to drive the oil price significantly higher and we doubt very much they would be prepared to do that for very long.

Moreover ,the other OPEC countries have a history of cheating on their output quotas and would probably be unlikely to agree deep cuts to the production of the only resource they have to sell.

We judge the oil price has likely peaked for now and a price range of US$40.– US$60 is now likely to dominate. 

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4th December - Can the S&P rally extend?

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3rd November - Why the rate hike weakens the Pound

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