Currently viewing the tag: "Brent Crude"
View: Brent remains a m/t bear play despite the seemingly hot geopolitical backdrop
It has been difficult to flick through any weekend media without stumbling across detailed editorials on the prospects for a pre-emptive Israeli strike against Iran’s nuclear programme in October, ahead of the US Presidential election. The logic of this timeframe centres on what PM Netanyahu’s camp allegedly feel is the final opportunity to mount a unilateral strike against increasingly hardened Iranian targets, feeling that a second term Obama would be far more likely to resist military intervention that by then only the US would have the firepower to execute. This tension has of course been on the markets mind for many months, even years, with a decent proportion of the rise in oil prices post Arab-spring linked to geopolitical risks in the region which Iran is the very centre of.
Full report below….
View: Still prefer Gold over balance of commodity complex, specifically Oil
Markets have been gearing up all summer for another dose of stimulus from the Federal Reserve and increasingly, the prospect of hard action from the ECB to prop up peripheral debtors, which although sterilised would still fit under the umbrella of looser monetary policy. Equities went early and have been range trading near the highs for the year as they await these decisions but other doors have opened with Gold breaking out of its long held trading range on August 21st to take run back towards the $1,700 level and commodities more generally have continued to edge higher, evident in the rise in the CRB and GSCI indices. Of course not all of this appreciation has been driven by expectations of more central bank printing; soft commodities have pushed up on US drought conditions specifically and oil prices continue to draw a bid from fears over Israel’s willingness to strike Iran’s nuclear programme not to mention the Syria situation which by itself is irrelevant for oil but nonetheless reminds on how divided the Middle East is (Syria in many ways now looks like a Saudi/Iran proxy war).
Full report below…
View: Sell the corrective Brent rally, leaning on key $105.90/106.00 resistance level
Economic risks and a paring back of expectations for conflict over the Iranian nuclear issue have combined to pull oil prices lower in recent weeks, the sell-off in Brent extending right back to the $88.49 level before basing in late June. Over the past week we’ve seen quite a sharp counter-trend bounce develop, the triggers being a surprisingly constructive Eurozone summit and the kicking in of that long planned European Iranian oil embargo. The market has been oversold for some time so this move, despite its ferocity, remains a counter-trend bounce with room to extend towards $102.37/46 and perhaps even $105.90/106.00 where trend line resistance, the 100wk MA and the 38.2% Fibonacci retracement of the Aug ‘10/Apr ’11 rally combine.
Full report below…
View: Brent resistance solid at $115, near-term strength should be sold
Following our last update on Brent in early September (http://wp.me/p1G1Fr-cr) we got the immediate move to the downside we were looking for (10% or so), but the selloff never quite ran to the extent we’d hoped, instead bouncing aggressively from the October 4th low at $99.11 (based on the CO1 chart from Bloomberg) right back to the top end of September’s trading range. In fact, the market was just 10 cents shy of the top of channel resistance before the rally faltered last week.
We’re sceptical this recovery marks the start of a push back to the highs of the early summer though. There remain plenty of headwinds for crude to face. Slower global growth the principle factor although there are new dynamics at work in the US too, specifically the impact of shale gas (and perhaps soon shale oil). Those fretting over Middle East risks – which have stoked prices since the spring – might also be sleeping a little easier following Israel’s prisoner swap for captured soldier Gilad Shalit which hints at some thawing of tensions there, while in Libya the capture/demise of Gaddafi should be a watershed for the country, oil production had already resumed (albeit short of earlier capacity) helping rebuild some spare capacity. We imagine that recent US accusations that Iran plotted with a Mexican drug gang to assassinate the Saudi ambassador at his favourite restaurant – which was partly a catalyst to the move up to the October 14th high @ $114.80 – will fade back towards fiction too.
Short Brent also offers exposure to the dollar’s broader performance. Although a recovery in risk appetite and corresponding dip in the DXY has left the bears bloodied this month, cyclical positives should be coming into play for the dollar and in turn take some more of the froth out of commodity markets. Specifically we look to the diverging prospects for growth between the US and Europe and narrowing interest rate spreads.
This all adds to support for the technical picture which now looks more bearish again. The recent push higher failed to surpass those September peaks keeping that pattern of lower lows in place from late April. Furthermore the recent low, at least on a closing basis – which is more important – was also below the May/Jun and August bottoms. Currently the drop back has stalled at the $108.70 support line but this isn’t that substantial a level. It might be strong enough to provide room for a short-term bounce back into the $111’s but we’d expect to see sellers step back here.
The ultimate objective should be a renewed decline that would take the market down through the $99.11 marker. Note the base of the channel is well below $95.00 now, a level we think Brent should trade through before year-end. Our earlier target of $80.00 still looks viable longer-term, but first things first. There is key dependent to this scenario though, that the DXY holds above support which currently spans 75.85/76.30 which we’ve identified a number of times. If this falters a move back above $115.00 is likely, although we wouldn’t be tempted to chase that given trends elsewhere in the commodity complex (copper on the first chart specifically).
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View: Sub $80 Brent realistic as growth weakens/dollar gains
Firstly, our past analysis has focused on WTI, but as has been well documented in recent months this is very much a broken contract and has fading merit in its use as a potential economic barometer. One only has to look at the chart below to see that the relationship with petrol prices – which WTI previously moved in lockstep with – broke down at the end of last year. Those filling their cars up at the pump and WTI are no doubt well aware of this already; policy makers should also take note – releasing supply from the strategic reserve doesn’t do much, aside from creating arbitrage opportunities for physical traders. In this piece we focus on brent.
Brent has held up better in recent weeks but this as looks as much an opportunity as curse. Economic data is hardly positive from a demand perspective. Of course demand from the developing world and Asia will continue to increase over the medium-term but softening demand out of the US and Europe now should be enough to rebuild a supply cushion which in turn will take some of the froth out of prices. Speculative demand also risks being squeezed further as market falls trigger outflows from investment funds, volatility increases and more importantly the market re-prices in the face of a strengthening dollar.
Technically the risk reward looks good from current levels. Brent is not that far from recent highs based on typical volatility in this contract. Indeed, the base of the current trading range is close to 96.70 vs. the 111.58 area we’re currently trading and realistic targets based on a more pronounced correction (built around our core macro views) are closer to $86.70/$91.85 initially and below support there $80.00, which proved to be something of a pivot level during the latter part of 2009 and throughout 2010. We’d be happy running shorts while front month trades sub 116.80/117.00 and for those with slightly deeper pockets $120.00. Perhaps this is one for the gold bugs who no doubt expect gold to shine as risk aversion increases. We’re not so convinced by this argument but would prefer to be short brent than gold and if long gold short brent too which should provide a hedge against an extension of the dollar rally.
The wildcard remains geopolitics of course; Libya production is set to remain below potential due to damage incurred during the now concluding civil war. Tensions elsewhere remain high with Syria important at a regional level. Tensions between Turkey/Egypt and Israel are of course not helpful and there is Iran and Bahrain was not too long ago topping news sheets. However, it should be noted that many of the earlier tensions were exacerbated by rising commodity, specifically food, prices. If we’re right about a shift in the dollar these as a driver of stress in the region should also pare back.
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WTI has been making modest headway over the past couple of days, underpinned by some recovery in risk appetite which has lifted the whole industrial commodity complex. To clear out the remaining bears we’d need to see Nymex crude (CL1) clear resistance at $98.91 and $100.18 which would leave the path clear to try and crack $102.89 and push on to the more solid looking $105.47 area. Mid-term we still believe higher levels will present a selling opportunity but shorter-term feel patience is needed, shifting our stance from our June 29th update where said fading rallies in the $95.00-$100.00 zone offered good risk/return dynamics. Now only a close below $94.32 would shift the bias lower again and in the interim there is a good chance we see oil in triple digits again. An alternate scenario that would turn us bearish would be an advance in the dollar index above 76.90, providing that is crude prices are still up here at that juncture.
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Nymex crude (CL1) has had a nice move up today with a 2.2% gain. However this merely brings prices to the top of the current trading range and critically resistance at $96.11/$96.26 is still untroubled. Any further headway towards these markers should see spec shorts tempted back, with the current bear trend needing a push through $97.10/30 to suggest we’ve seen a more damaging setback – and in turn shifting the s/t target to $100. Below $100 downside targets remain the the real draw for the bigger accounts.
Indeed, we feel fading rallies in the $95.00-$100.00 zone offers good risk/return dynamics aiming ultimately for the mid $80.00’s. A move back through $92.77/80 is the first objective and should see shorts begin to add to positions again, looking for a test and eventual break of the $89.60/70 June lows. Once this area is cleared a push towards more important mid-term support, which lies at $83.34 (38.2% Fib of the Dec ‘08/May ’11 rally) and $83.85 (the Feb low) would be on the cards.
