views

FORK IN THE ROAD FOR THE PRICE OF OIL

DAVID MORRISON
CFD MARKET STRATEGIST, GFT

GLOBAL equities have taken a hammering over the past month. A whole host of issues which had been simmering on the back-burner have begun to boil over. The European sovereign debt crisis, concerns over the effects of tighter financial regulation and the continuing withdrawal of liquidity by the Chinese authorities are all taking their toll.

Since this rally began in March 2009, we have now seen three significant pull-backs. But at 13 per cent from the recent peak in April to current levels, this sell-off is the deepest by a fair margin. Over the next few weeks we should discover whether this is a healthy correction from which equities can push higher, or the end of the bear market rally. If the latter, then equities have a lot further to fall.

Another market to take a tumble has been crude oil. After Brent hit a high just below $90 per barrel earlier this month, the price slumped to near-enough $70 by the end of last week. Analysts warned that prices above $80 were unjustified given the underlying fundamentals. Global demand has remained well below the 2007 levels while supply remains steady. US inventories have consistently surprised to the upside, despite evidence that speculative stockpiling (both on- and off-shore) reached its peak a year ago. Nevertheless, the bulls believe that the global recovery is in place and demand will pick up. Furthermore, oil could be a good store of value (better than gold even) given its strategic importance, and therefore a sensible method of diversifying out of the dollar.

But it looks like that trade got overcrowded – as equities fell further and margin calls picked up, leveraged traders had to start closing out of their most profitable positions. With the People’s Bank of China continuing to withdraw liquidity and more European countries announcing austerity measures, demand for oil looks likely to fall.

The question now is whether we consolidate at these lower levels and trade in the $70-$80 range, or plunge back towards $35.