AFTER a long sustained period of rising oil prices, many traders had their fingers burnt in last week’s commodity crash. Though with 20-20 hindsight it is easy to say that there was inevitably going to be a bump in the road for the black gold, many are smarting from the hit. This year has seen turmoil in many of the world’s top oil producing regions, whether in the Middle East during the “Arab Spring” of unrest or the earthquakes in Japan. With this restriction of supply, along with some gouging of the market by oil cartel Opec, it was expected that oil bulls would lead a charmed life.
But is this the start of a long term downturn, or a correction by the markets before returning to the trend of the last two years?
Interestingly, Michael Hewson, market analyst for CMC Markets points to similar price action last year where we saw a pull-back before the price continued on an upwards trend (see graph, right). He expects to see a repeat of this behaviour this time around. “In the short term, we’ve seen a bit of a pull back. In the long term, it’s going to carry on its long term trend. It has the potential to reach $95 for US and $105 for Brent crude,” says Hewson. “Generally, when things are positive for equities, they’re positive for crude. But if we continue to get disappointing economic data, then that might rein the price in. However, unless we get a black swan event, oil is going to continue to climb,” he adds.
The tail end of last week saw a lot of volatility in the markets, especially on the back of economic data. Oil prices rallied following better than expected non-farm payroll figures, but that was short lived. Oil settled Friday at $97.18 a barrel, down about 15 per cent for the week. According to David Jones, chief market strategist for IG Index, “this is not the end of the rise of oil prices. There is a lot of nervous money around, but we are still in the trend. On 2 May, following the announcement that Osama Bin Laden had been killed we saw oil hitting multi-year highs.” Regarding the non-farm payroll figures, he says that “the fact that they were up signals that there is still demand for commodities.”
But though a restricted supply will continue to struggle to keep up with global demand, it is inevitable that last week will leave a feeling of nervousness in the oil markets.