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Has Oil Turned?

06 April 2009

The Technical Trader’s view:

Monthly Continuation Chart
This shows the pullback to the massive long-established supports in the market

Weekly Continuation Chart
This tantalizes with the prospect of a complex Double or TRIPLE Bottom – that may
have completed. Watch carefully for the close of this week above the horizontals – especially$50.47.

Daily bar chart May 2009.
This is rather more equivocal.
Note the small range that the market is residing within. We need to break that to the upside before getting excited. But the real breakthrough depends on a push up through the $58.31 level.

The Macro Trader’s view:
As first the US then Europe, and then the global economy lurched towards and began recession, the oil price collapsed from an all time high of around $145.00, to a recent low of $33.00 in a matter of 6 months.

With the global financial system staring at complete collapse, the current recession is being compared to the 1930’s depression and the 1907 depression, which was also caused by a financial crisis.

The global economy slowed and world trade has contracted for the first time in 60 years. Demand for oil to fell sharply, forcing OPEC to heavily reduce output. And the price kept falling.

But more recently the market seems to have found a floor and has begun to recover. The question now being asked is:

Is this a more general recovery, leading into a new, but perhaps more sober Bull market, or is it a correction in a Bear market that could yet resolve to further weakness?

Initially we were firm in our view that the market was correcting, the major economies were still reporting ever weakening data, with the spotlight shifting from the US economy onto Euro, Japan and China. But as the world’s leaders embarked on a combination of fiscal stimulus and or quantum easing, expectations have grown that a recovery cannot now be far off. Indeed in the US data has become more mixed with retail sales, New & Existing home sales and durable goods all showing improvement. Even the ISM manufacturing survey has inched away from the lows previously seen.
Maybe this is a false dawn with unemployment in the US continuing to rise, or the labour market acting as usual as a lagging indicator. What is clear though is that markets are currently optimistic, especially after this week’s G20 meeting which produced agreement to increase the IMF’S resources and make money available to support world trade.

If these and earlier measures start to show fruit then oil can begin a more broad-based rally. The longer term issues of adequate supply haven’t gone away, and so far only the US economy looks to be steadying, the other major economies are still weakening. So talk of a new Bull market may yet prove premature.

Mark Sturdy,
John Lewis
Seven Days Ahead

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