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Oil: the bears remain in charge

05 December 2008

The Technical Trader’s view:

MONTHLY CONTINUATION CHART: The long bull market has been smashed: the prior High at $78.40 has long gone, the 61.8% retracement broken, the diagonal trend line supports broken, the only support of substance lies at the horizontal from the succession of highs around $40. We think those levels will be tested by the market.

WEEKLY CHART: The market paused at the Pivotal low at $51.56…

DAILY CHART: And now (this is the Feb 09 contract) that level has been broken. Use the band at $49.40- $51.56 for Stops. The market looks set to go on down in the short and medium-term

The Macro Trader’s view:

It almost seems unbelievable that only 4 months ago oil prices made an all time high of around $147.00 a barrel, when today it is trading at close to $100.00 lower in the March 09 contract at $49.12. What brought about this dramatic collapse and has the market further to fall? The oil price was driven up by several factors:

1. The invasion of Iraq was undoubtedly the catalyst for the rally,

2. Geopolitical tension in the Middle East between Israel and its neighbours,

3. Geopolitical tension between Iran and the major powers over the latter’s development of nuclear technology, suspected of being a cover for developing a nuclear weapon, and

4. The economic growth of China and India to an extent where they are almost economic super powers with an insatiable appetite for commodities and raw materials, but especially energy.

But things are changing: the Iraq situation has ceased being a support for oil as the US and allies seek an exit strategy, tensions involving Israel have cooled as peace is again being sought, and the Iran question has quietly slipped from view as President Bush entered the twilight of his Presidency, removing geopolitics as a major support. That leaves the energy demand from China and India and the perceived finite supply of oil driving prices to their all time high. However as soon as the financial crisis hit, caused, arguably, by the decision in the US to allow Lehman Brothers to fail, economic meltdown emerged as the single biggest threat to the global economy, not the price of oil. And although governments worldwide rushed to enact substantive rescue packages for their ailing financial systems that saw the value of Bank’s shares collapse around the world, the reality of economic weakness, derived originally from the credit crunch, had hit home and oil traders realised that falling demand in the major developed and emerging economies, would lead to a substantial drop in the demand for oil. Now, as a deep recession is almost a certainty, despite record low interest rates in the US, UK and elsewhere, the economic outlook remains grim.

In the US, interest rates look set to be reduced to zero, with UK rates falling further. In China growth forecasts for 2009 have been slashed to a little over 7%, and while that sounds strong, for a country recently used to growth running at 10 or 11% that will feel like recession. In short, the global economy continues to contract and despite aggressive action from policy makers through the use of lower interest rates, liquidity schemes and fiscal policy. The bottom isn’t yet in sight, so how much lower can oil prices go? Much lower than this despite the threat of further output cuts from OPEC.

Mark Sturdy, John Lewis
Seven Days Ahead

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