Commodities | Jun 20 2013
Oil has gradually being trading higher over the course of the week and as it knocks into resistance at US98.50 [WTI] we have decided to analyse the market a little more in depth to see whether or not we feel that it has sufficient momentum in order to break resistance and then trade through to US100.00. In last week's report we noted that demand over the summer drive time, weather issues surrounding a hot summer and the up and coming hurricane season have increased expectations about a pick-up in demand or a restriction in supply, however at the time of writing and given the increased level of inventories it was not sufficient reason to see a real lift in prices being sustained. The pros and cons balanced each other out. However, since then we have a seen prices steadily rise, the USD under pressure, increased expectations about the US recovery and more importantly traders looking towards the Middle East. Increased tensions in Syria are seeing traders going long, factoring in geopolitical risks associated with the region as they see developments could spill over into neighboring oil producing countries.
That’s the key, “neighboring producers” and this is where we diverge from the market's thinking and suspect that crude at these levels is very expensive. Why?
Over the last six months we have seen Syria’s neighbors all try to establish an argument in order to achieve their own domestic goals, using the nations civil issues as a scapegoat for their own pursuits. The main contenders are Iran and Israel and through the conflict both are looking for political and sovereign gains. It is interesting to see that both sides have reason to expand the conflict however nobody is prepared to take the next step for obvious reasons. Israel has even gone to the extraordinary steps of actually bombing Syria and yet Syria has resisted these moves and failed to retaliate. Further it's been reported by the US that the Assad Government has used chemical weapons on its own people, thereby aggravating the global community and perhaps providing an excuse, a la Iraq, to become more involved, however so far restraint has been the order. With the current machinations in play traders are factoring a premium, which we feel is not warranted.
The point is that neither Syria nor Israel do not produce oil, so in reality the price of oil should not be at these levels based on Middle East concerns. It can be argued that any escalation could bring in producers from the region, however the only producer than would be drawn in is Iran who has been funding the Assad regime. The people of Iran have recently elected a new President, Hassan Rohani, who has primarily put Iran back on the map for negotiations on its nuclear front. So any potential attack on Iran seems more remote as the “cat and mouse “ game we have been seeing over the last several years could be resolved, via a more moderate government. Further, Iran production in oil continues to lose momentum as the G8 sanctions on oil exports continue to inflict pain on production.
So in reality when we analyse the situation we feel that the Syrian conflict will remain a domestic issue, Iran is on its own path for reconciliation over its nuclear program, and Israel will follow the US line. As such, buying oil on the back of the situation in the Middle East at the moment is not warranted unless a real line in the sand is drawn. This line needs to involve a real conflict and we don't believe the valid points are there. So what could be the real reason for the lift?
As we have mentioned, if you line up the reasons for the move higher we feel it is based on a series of “happenings” rather than just one, but we see the reasons as only temporary and or seasonally based. A sustained move over US98.50 we feel is not warranted given the inventory builds. This price might be tested but we expect these levels not to be maintained.
Over the last month we have identified a trading range of US88.80 to US98.50 and given we are visiting the top end of the range we are searching for reason for it to push through. Currently, a push could be realized on the back of a weaker USD and reports of increased volatility in the weathe,r however there is nothing really solid that can be the catalyst for a move higher. Well, nothing yet on the horizon.
We have a small short at the moment.
Chart Point – Oil:
“US98.50 on the top, likewise US92.00 is support on the downside”. Well we are currently visiting the topside and we have been here a few times. Given the market has traded here six times since the beginning of the year it is a big level that warrants a big reason to stay above. Keep a close eye on the price action. Momentum indicators are toppy and if it fails at these levels we suggest lower prices will prevail. We remain nervously short.
.jpg)
This report is not, and should not be construed as, an offer to buy or sell, or as a solicitation of an offer to buy or sell, products, securities or investments. This report does not, and should not be construed as acting to, sponsor, advocate, endorse or promote products or any other products, securities or investments. This report does not purport to make any recommendations or provide any investment or other advice with respect to the purchase, sale or other disposition of products, securities or investments, including, without limitation, any advice to the effect that any related transaction is appropriate for any investment objective or financial situation of a prospective investor. A decision to invest in securities or investments should not be made in reliance on any of the statements in this report. Before making any investment decision, prospective investors should seek advice from their financial advisers, take into account their individual financial needs and circumstances and carefully consider the risks associated with such investment decision.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.