Nymex light crude encountered resistance at $60/barrel. Expect retracement to test the new support level at $54/barrel. Respect would indicate a primary advance, while failure would suggest recent gains are no more than a bear market rally and another test of $44 is likely. 13-Week Twiggs Momentum below zero continues to reflect a primary down-trend.
Inflation-adjusted crude oil prices are close to their 2008 low, but if we look back to the 1980s and 1990s, prior to China’s entry into the markets (apart from a brief spike in September 1990) that was the 20-year high.
Nymex light crude rallied since breaking resistance at $54/barrel, but this does not necessarily indicate a reversal. Only retracement that respects the new support level (at $54) would confirm this a primary up-trend rather than a bear market rally.
Nymex Light Crude broke resistance at $55/barrel, signaling the end of the narrow consolidation of the past few months. Some have heralded this as the end of the bear trend and start of a bull market.
If we examine the recent consolidation — shown here on June 2015 Light Crude futures — it is clear that it is broadening, with the second trough below the first, rather than rectangular. Peaks are likely to follow a similar pattern; so a higher peak does not necessarily mean a breakout. Broadening wedges tend to be unreliable reversal signals and I would wait for retracement that respects the new support level at $55 to confirm the breakout.
Crude is consolidating in a narrow band between $44 and $55/barrel. Supply continues to exceed demand and storage facilities are approaching capacity. The bear trend is expected to continue. Failure of support at $44/barrel would confirm.
Saudi Arabia bombs its neighbor Yemen. Another war in the Middle East and crude prices rally. Nymex Light Crude retreated above support at $45/barrel, testing $50, while Brent Crude found support at $54. The Saudis are obviously concerned about the success of Iranian-backed rebels in their close neighbor and are prepared to intervene militarily (Putin will probably send a telegram of support, attempting to draw a parallel although the situation in Ukraine is vastly different). Expect further consolidation between $45 and $55 for Nymex Light Crude. Supply continues to exceed demand and storage facilities are approaching capacity. The bear trend is likely to continue despite the current interruption.
Nymex light crude (April 2015 contract) broke support at $45/barrel, warning of a decline to $35/barrel*.
* Target calculation: 45 – ( 55 – 45 ) = 35
Nymex Light Crude is headed for another test of support at $45/barrel. Breach would signal a decline, with a medium-term target of $35/barrel*.
* Target calculation: 45 – ( 55 – 45 ) = 35
Saturation of available storage capacity (see Crude in Contango) is expected to force sellers into the market and drive prices lower.
Nymex WTI Light Crude is testing resistance at $54/barrel, while Brent Crude is at $62/barrel. WTI above $54/barrel would signal a bear market rally, but is likely to leave the primary trend unaltered. Breach of support at $45/barrel would signal another decline.
The crude oil market is in contango, with spot prices lower than future prices, encouraging traders to store oil until prices rise. But Leslie Shaffer reports that oil storage is nearing full capacity:
“We’re going to see pretty fast inventory builds over the next few weeks,” Francisco Blanch, head of commodity research at Bank of America-Merrill Lynch, told CNBC Wednesday, noting that global supply is running around 1.4 million barrels a day above demand.
“If you run out of space, prices tend to react a lot more violently to adjust that supply and demand imbalance and that’s what we expect over the next few weeks,” he said, forecasting both WTI and Brent will fall toward $30 a barrel.
West Texas Crude has been falling since breaking support at $75/barrel, following through below $50/barrel. A test of 2009 lows at $30/barrel is likely unless there is major disruption to supply.
When we adjust crude prices for inflation, they remain high by historical standards. Prior to the China boom of the early 2000s, the ratio of WTI Crude to CPI had seldom ventured above $20/barrel when measured in 1982-1984 dollars (shown as 0.2 on the chart below). After the dramatic fall of the last 3 months, the adjusted price at the end of December 2014 (in 1982-1984 dollars) is still $25.20/barrel (0.252 on the chart) — well above the former high.
Financial markets have endured a fair degree of turbulence in the last 6 months and made a faltering start to the new calendar year. Is this a sign of an imminent collapse or will markets recover to post further gains in 2015? Key determinants will be falling oil prices and the impact of monetary policy in the big four economies: the US, EU, China and Japan.
Crude oil is plunging towards its 2008 low of $30 per barrel. Supply is inelastic, with the Saudis refusing to play their normal role as swing producer and cut production to stabilize prices. Demand will take time to recover despite the massive stimulus effect of low oil prices to the global economy. If current supply levels continue, the 2008 bottom is under threat.
More likely than a cut in demand, is a threat to supply, with political turmoil erupting in one or more of the countries reliant on oil revenue: Russia, Iran, Venezuela, Nigeria, Iraq, Libya and other vulnerable states. Political turmoil could be a reaction to food scarcity and rising prices, as Venezuelans are already experiencing, or it could be fomented by one/more vulnerable producers seeking to throttle supply and drive up prices. Apart from domestic instability, sovereign default by Russia, while still unlikely, could also unsettle financial markets.
Energy stocks are falling, increasing downward pressure on broad market indices.
Inflation expectations are falling, with the spread between 5-year Treasury yields and the equivalent inflation-adjusted TIPS well below the Fed’s 2 percent inflation target.
Will falling oil prices increase the risk of deflation, as suggested by some pundits? Highly unlikely. Falling prices may shift consumer spending patterns, with consumers spending the savings from lower energy prices on other discretionary items. But this is likely to boost confidence and encourage further spending, rather than cause a contraction of total spending.
Falling prices caused by a contraction in total spending, as in 2008/2009, are an entirely different matter. Consumers increased savings and repaid debt in response to rising uncertainty. Prices fell in response to the resulting contraction in spending. Shrinking aggregate demand impacted on incomes, causing further cuts in spending and a self-reinforcing, deflationary spiral which caused serious damage to the economy despite the Fed’s best efforts.
Current price falls are driven by increasing supply, while a deflationary spiral is caused by contracting aggregate demand. Lower oil prices will act as a huge stimulus for the global economy towards the second half of the year and are likely to lift growth rates.
Low inflation is likely to ease pressure on the Fed to lift interest rates. The S&P 500 continues in a bull-trend, with 13-week Twiggs Money Flow trending above zero, indicating long-term buying pressure. Respect of support at 2000 would suggest another advance and breakout above 2100 would confirm.
* Target calculation: 2000 + ( 2000 – 1800 ) = 2200
Rising troughs on CBOE Volatility Index (VIX) indicate a shift from low to moderate risk, but there is no cause for concern unless we see activity ranging between 20 and 30.
The graph below compares the annual rate of change in total assets of the European Central Bank (ECB) to the Fed. Fed assets are stated net of excess reserve deposits which pay interest to depositing banks, something not offered by the ECB. Both the Fed and ECB rapidly expanded their balance sheets in 2008 in response to the global financial crisis, while the ECB had to repeat the process in 2011/2012 to address the PIIGS sovereign debt crisis. The ECB’s mistake was allowing their balance sheet to shrink in 2013, in response to pressure from some members (primarily Germany) to return to austerity. The Fed was far more wary of aftershocks and maintained an expansionary policy throughout this period. The US economy strengthened as a result, while the EU contracted and threatens a deflationary spiral if the ECB does not alter course.
Dow Jones Euro Stoxx 50 proved surprisingly resilient in the circumstances, breaking above 3000. Expect further consolidation between 3000 and 3300 until we get a clear direction from the ECB. Declining 13-Week Twiggs Momentum is typical of a long-term consolidation. But reversal below 3000 would warn of a contraction.
The PBOC is also adopting expansionary monetary policy in response to declining activity and a weakening Yen (which erodes China’s export advantage). The Shanghai Composite Index surged, with 13-week Twiggs Money Flow indicating strong buying pressure. Breakout above 3400/3500 would suggest another up-trend.
We have a similar situation in Japan, with the BOJ expanding on a massive scale, driving stocks higher and the Yen lower. The Nikkei 225 found resistance at its 2007 high of 18000, but Twiggs Money Flow appears strong and the index is likely to respect support at 16000.
Aggressive monetary policy adopted by the two central banks is high risk and could end in tears. Especially if the two start to compete in currency markets for an export advantage.
The RBA is far more conservative and likely to rely on falling commodity prices to weaken the Australian Dollar. Further interest rate cuts seem unlikely given the current scenario. The ASX 200 has not made any progress since July last year, but rising troughs on 13-week Twiggs Money Flow indicate healthy support at 5000. Breakout above 5500 is unlikely at present, but would suggest another advance.
Low iron ore, coal and LNG gas prices are likely to inhibit the Australian recovery. What is needed is a strong program of infrastructure investment to restore confidence. This seems to be slow in getting off the ground. What is important is investment in productive assets, that produce market related returns on investment, rather than social infrastructure. The acid test is whether the completed assets can be sold to recoup money invested, providing funding for further infrastructure assets or to repay debt.
The only value of stock forecasters is to make fortune-tellers look good.
~ Warren Buffett
