19th March - What's holding Oil back?
19 March 2018
TECHNICAL:
MONTHLY CHART
The oil market is in the grip of a big H&S reversal pattern that is set to drive it up to over a $100.
DAILY CHART
But the for that last two months the price action has been downwards or sideways.
It well supported it seems at the Prior High horizontal from 58.66, but the rally from that level petered out.
All is not lost though, for the bulls.
The pause remains for the moment insignificant relative to the scale of the H&S pattern that is encouraging the bulls.
That is that a bull continuation triangle in the making? Watch carefully for a break of the falling diagonal at 62.50.
And within that triangle is that a null falling wedge that has just completed?
So we are close to completing two patterns that may reignite the bull momentum!
FUNDAMENTALS:
The price action in oil over recent months has closely mirrored that of equity markets and specifically the US S&P. As the S&P rallied into January, making new all-time-highs, the oil market looked set for a renewed bull run, fuelled by the OPEC/Russia extended production cut intended to reduce the global oil glut and rebalance supply/demand.
But the rallies in equities and oil were cut short. The new Fed Chairman; Powell caused an upset when he testified in Congress shortly after taking up his new role, by sounding more hawkish on policy than his predecessor Janet Yellen. So much so that stocks suffered a steep sell off and oil followed suit.
The outlook for stocks is now confused because US President Trump has announced trade tariffs on Steel and Aluminium, declaring trade wars are good and winnable! History tells a different story and they often lead to conflict.
But what of oil? Is the oil price tied to stocks or are there other dynamics at work?
Clearly higher oil prices help US shale producers as the cost of extraction is higher than conventional oil extraction and that plays a big part in restraining oil prices. Add in the emergence of the US as the world’s largest energy producer, over taking both Saudi Arabia and Russia and the previous all time highs in oil look out of reach.
Apart from the US shale boom, Trump has opened up areas for oil exploration previously off-limits and the IEA has recently forecast a steady increase in oil supply despite the OPEC/Russia cut backs.
But there is another element to consider.
No one knows how far Trump intends to pursue his America first policy. Are the recent tariffs on Steel and Aluminium the full story or just the beginning? He has already mentioned placing tariffs on car imports. And what of the response from America’s trading partners?
So far it seems they have adopted a policy of wait and see. But if Trump intends to hit a wider range of imports then clearly the likes of Japan, China and the EU will respond. The IMF has already sounded a warning claiming a trade war would damage global trade and global economic growth and therein lies the threat to oil prices.
A trade war may not be in play right now, but the signs are ominous. Trump has called on China to come up with a plan to cut her trade surplus with the US by US$100 Bn. Iif they do not presumably Trump will impose tariffs.
But what Trump fails to recognise is the positive impact globalisation has had on global economic growth and wealth creation. If a full-scale trade war breaks out, growth will suffer, inflation will increase and demand for oil will decrease and at a time when the US is materially increasing the amount of oil it extracts, not just for domestic use, but for export too.
For now, the Oil price is likely to remain in the doldrums due to the current price action in stocks. But in the medium and long term, the writing is on the wall: oil prices of US$100 look unlikely to be repeated and as the price of US shale extraction continues due to drop on technological advances. As wind power and solar power production increases, US$70 may be out of reach too.
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26th March 2018 - Has the Bund turned bullish? 
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12th March - Have US Bonds broken down?