Tuesday, April 3, 2012

Is oil’s price ready for a fall?

In an article in Financial Times last week, Ali Naimi, Saudi Arabia’s Minister of Petroleum and Mineral Resources wrote: "High international oil prices are bad news. Bad for Europe, bad for the U.S., bad for emerging economies and bad for the world's poorest nations… It is the perceived potential shortage of oil keeping prices high…Supply is not the problem…there is no rational reason why oil prices are continuing to remain at these high levels."

Gasoline (petrol) price in the US is hovering near $1 per litre, which has led to lower consumption in an economy still in recovery mode. 50% higher price in India has not curtailed consumption much, but has pushed the government’s current account deficit deeper into the red. Eurozone countries - where petrol prices are much higher than India’s – are facing a double-dip recession.

High oil prices are taking their toll on global economies. So, who is benefitting from the high prices, and will the prices come down any time soon? The oil producing nations are minting money – as evidenced by the lapping up of real estate in and around London by sheikhs from Middle-East. But they are smart enough not to kill the goose that lays golden eggs.

Production is being increased by OPEC members like Saudi Arabia, Libya, Iraq and Angola to cool prices down but the effect may only be visible over the next few months. Some new oil fields in South America and Africa should start production soon. But don’t expect oil’s price to fall by a lot.

BrentCrude_Apr0212

The two years weekly chart pattern of Brent Crude Oil shows that the price is struggling to cross its year-ago top of 127. All three EMAs are rising and oil’s price is trading above them – a typical bull market chart. Note that the gap between the 50 week EMA and the 200 week EMA is widening and oil is trading far above its 200 week EMA. A correction may be around the corner.

Is oil’s price forming a bearish double-top reversal pattern? Or, is it forming the ‘handle’ of a bullish ‘cup and handle’ continuation pattern? Those are good questions that need to be taken up separately.

A ‘double-top’ will be confirmed only if oil’s price falls below its previous low of 98. If it does, then a test of its 2 year low price of 70 is a possibility. But the probability of such a steep fall is low. Why? Because a double-top has to fulfill the volume criteria – lower volumes during the formation of the second top. That doesn’t seem to be the case here.

What about the ‘cup and handle’? There is a good possibility of the price dropping to the 50 week EMA – which is half-way between the recent peak of 128 and the trough of 98 – to complete the ‘handle’. A subsequent rise above the 128 level should be accompanied by a significant increase in volumes. A fall below the 50 week EMA can negate the ‘cup and handle’ pattern.

The technical indicators are bullish. The RSI is above its 50% level. The MACD is positive and above its signal line. The slow stochastic is in its overbought zone. However, all three indicators are showing negative divergences by touching lower tops during the recent consolidation around the 125 level.

The levels to watch are 98, 112 and 128. A fall below 112 and/or 98 will be bearish. A rise above 128 will be bullish.

That was the long answer. The short answer is: Looks like it – both from fundamental and technical points of view.

(Note: This is my first post on oil’s chart pattern. It will be nice to receive some feedback from you – whether you liked reading this information and found it relevant. Unless oil’s price starts to fall, inflation won’t come down. Neither will government’s deficit. Both are inconducive for a rising stock market.)

3 comments:

venkat said...

Dear Subhankar,
Fundamentals are not supporting strong upmoves. IEA/OPEC and DOE have all been reducing global demand forecasts for 2012 from over 90 b bpd to under 89 b bpd over the last few months. The current up move seems to be driven more by technicals. How far can technicals drive the prices up without support from fundamentals?

Suresh said...

Subhankarji

Since the price of oil has such a significant impact on our economy, this is an important analysis that was missing all along. Now that it has been addressed to, please continue to provide this analysis regularly.

Suresh

Subhankar said...

@venkat: Thanks for your comments. Apparently, increasing demand from China and India has also created an upward pressure on prices. It will be interesting to see how this plays out.

@Suresh: Appreciate your feedback. I'll try to post an update every two weeks or so.