Commodities | May 10 2012
From last week's comment to today's represents a complete reversal of our ideas. We have seen a 8% fall in the price of oil. The interesting aspect to the fall was that it all occurred prior to the weekend and we feel it was a very large order that went through the market. However, as a result of the elections in France and Greece all the bearish news that we felt was factored into the market is now being written about, US inventories continue to grow, China’s soft landing is accelerating, and European woes continue to expand.
As we mentioned last week Europe represents only 9.4% of the top ten consuming nations, yet the majority of news supporting the fall originated from Europe. If you cast your mind back to the beginning of the year we started with an optimistic view of the economy and demand structure for the commodity, however as the year unfolded we became more bearish as to the effects the sovereign debit crisis as it spread to other economies. We experienced a lagged effect — first the problem then later the effects. We feel it will be the same this time round; negative sentiment in Europe will translate to weak demand around the globe. The market this time round will be quicker to factor this in and as such prices should fall.
However, this does have a silver lining: a 8% fall in the price of a primary input goes straight to companies bottom line; hence an additional 8% of profit. So if sentiment where to remain negative and prices driven lower then ultimately it would be good for an economic recovery.
In the US it is interesting to note that inventories remain high and builds remains strong and we suggest that this will continue. However, note that demand for products, gasoline and distillate also remain strong. This suggests that the economy is moving and momentum is picking up. The effects of a low prices will only aid demand, so given that we actually have good demand we suggest that dips we are seeing should be violent and temporary. Although we are long we have reduced our holding and may even dump the position if the European situations starts to spiral out of control.
The spread between WTI and Brent remains weak and we see it coming into US10, Perhaps this is a good level to commence a buy program.
Chart Point
The, move higher was short lived. It broke a solid trend line, if you placed your long stops at (WTI) US103.70, mentioned last week you should be ok. Momentum indicators remain bearish and there is potential for it to trade to US93.50, which is major support. The velocity of the move lower caught out a lot of people. At the moment we have to be bearish.
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