Monday, August 18, 2008

Crude oil Conundrum - II

As we proudly celebrated our Independence day here in India, a material change took place in the world currency markets and the commodities market. Euro plunged below 1.4700 against the USD and gold price broke an important support which may not bode well for bulls in the gold market.

Interestingly crude oil didn't go down as traders would have thought. Other major traded metals like silver, platinum and else were all down between seven percent to 10 percent. I was watching a major pivot in crude oil. The price range of $109 and $111 may not get broken this month in crude oil. Though it is not wise to go against the trend and buy on any support as market remains in a down trend, still there is room for some trade setup from this price. Have a look at the price graph below -

The current trend may get exhausted at $98 or on extension to $86. Though current price moves have nothing significant but a small reversal pattern appearing on today's hourly graph. If crude oil doesn't make a low below $109, we are in for a significant rally towards $125 to $130 in the next two weeks time. I say this as the probability of the first leg of downward move i.e. A of the corrective pattern may have formed at $111.35 which could have stretched to $109. Unless we close below $109 the probability of a significant bounce is very high as risk rewards favours the bulls rather than the bears. Otherwise if WTI traded on NYMEX closes below $109 a major bearish downward move will begin making all upmoves insignificant.

Looking at the long term graph the prices at clinging to a strong pivot support. Current trading at 113.35 we look at the long term channel and support at $109-$111 range.

Looking at the demand and supply picture the demand for oil has clearly suffered as US demand is down nearly 2.5% on an annual basis for the same period previous year. The short term energy outlook from DOE reveal several statistics which point towards weakening demand. The short term energy outlook estimated a moderate to flat growth in demand and a rise in production from Non-Opec members.

Note from the SHOE - 'If new projects come online as now anticipated, total non-OPEC supply is projected to rise by about 510,000 bbl/d in the second half of 2008 and by 850,000 bbl/d in 2009 compared with year-earlier levels. This compares with a 330,000 bbl/d decline in non-OPEC supply recorded during the first half of 2008'

In the short term crude oil prices would decline to lower levels and make surprise everyone on the extent of fall as it did on the steepness of rise. We should remember that we are in a long term bull market and if price decline to $75 also, it would be a much needed correction in its relentless rise to astronomical levels. Long term (i mean 3 years or more) crude oil is going to rise even faster and the fall would be only counter trend to the long term price moves. Long term demand and supply fundamentals still favour a strong rise in oil price but price never go up in a straight line, there would be trends and counter trends and we may focus our attention on trade setups rather than on big prices swings.

From current levels, unless crude oil closes below $109 there is little incentive to sell. We still remain in a downtrend in the medium term so the upmoves will be counter trending. Price may rise to $125 below starting the next downward move. On the Elliott wave count we may have formed the A of the corrective pattern and may well be into the B wave. Current a small wave 'a' inside wave B looks highly probable to take prices to $117 if $112.85 doesn't get violated.

Gold prices have plunged as per my expectation. August 21 can be a short term reversal day from a trend count perspective. Look for a loss in momentum in gold prices.

Equity price have been a no show as they gyrate in a range in the local markets. I feel upmove have that was sold into was on weak hands and next upmove may be sharp if Nifty doesn't break 4270.

I will put up a post on stocks and on gold in the next few days.

Sahil Kapoor
Comments are welcome

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