At the moment, the oil market appears to be in something of a state of turmoil. There are certain forces at play that will push prices up for the foreseeable future; yet recent events have created a situation that could have a dampening effect on prices, at least in the short to medium term.
Market Analysis
On the demand side, large economies, such as India and China, are still growing strongly. If this trend continues, it will ensure constant growth in the demand for oil in the short to medium term. On the other hand, economic activity in many important Western economies is still lacklustre. Despite several predictions of an imminent upturn, the US and UK economies have not lived up to expectations, which will, to a large extent, keep demand for oil in check. The upcoming summer months in the northern hemisphere will also act to keep demand for oil within reasonable limits during that period.
A number of countries have suffered crippling natural disasters in the past few months. The earthquake and subsequent tsunami in Japan was no doubt the worst of these and has now raised fears of a recession in one of the world’s biggest economies. Once the focus shifts from immediate need to rebuilding, the construction industry in Japan will no doubt receive a huge boost. This will, in turn, lead to stronger demand for various imported commodities and stimulate economic activity, and the demand for oil will increase.
The latest unrest in various oil producing countries of the Middle East/North Africa (MENA) region has created fear of disruption to the oil supplies. This situation has been exacerbated by recent developments in Libya, where a civil war could potentially break out after military intervention by Western powers. This will lead to further upward pressure on the price of oil.
Something else that has to be taken into account is that the threat of a nuclear disaster in Japan has made many nuclear powers rethink their approach towards this form of energy. Germany, for example, has already decided to close several of its older nuclear power stations.
Since nuclear energy is an alternative to oil, any development that curtails the supply of this alternative energy source will, in the long run, act to stimulate the demand for oil and push the price up even further.
What we will probably see in the short to medium term therefore, is a temporary lull in the demand for oil. In the medium to long term, everything points to higher oil prices and it would not be surprising to see new record prices within the next two years.
Technical Analysis
Technical analysis of the situation seems to confirm the foregoing conclusions. The market was in a strong bull run before the earthquake in Japan on 11th March 2011, but since then there has been a significant price correction, because many traders feared an imminent recession in Japan. The market reached a low on the 15th of March, with Brent Oil closing at 108.28 – see fig. 3.21.
At its lowest level, the price moved marginally below the Kijun Sen (the blue line) on the Ichimoku Kinko Hyo, but rebounded sharply from there and right now it is trading above both the blue line (Kijun Sen) and the shorter-term average, the Tenkan Sen (the red line).
Trading the Current Oil Market
The Ichimoku Kinko Hyo currently indicates a clear bull market. The Chinkou Span (the green line) is above the price of 21 days ago; the price is well above the cloud and also above both the blue and red lines of the Kijun Sen and Tenkan Sen.
A possible trading strategy is therefore to buy Brent with a stop loss placed at the red Tenkan Sen line. Along with the Ichimoku Kinko Hyo, this line always acts as your first level of support. Once the price breaks through the blue Kijun Sen, a long position is no longer advised.
The first resistance level is at 118.47, which was reached on 7th March. Once the price breaks through that level, watch out for 119.40, a previous high that was reached on 24th February. If the price breaks through this level, new highs are very possible.
As long as the price is above the cloud of the Ichimoku Hyo, medium term short trades cannot be advised. This does not mean, however, that an astute day trader cannot make money from short-term corrections in the price. In this instance, figure 3.21 should be redrawn using an hourly or even shorter-term chart. The same rule applies when the price is trading above the cloud; take in a long-term position. When it is in the cloud, stay out of the market and when it trades below the cloud, it is time to go short.
The contents of this report are for information purposes only. It is not intended as a recommendation to trade. InterTrader do not accept any responsibility for any use that may be made of the above or for the correctness or accuracy of the information provided.
