arious analysts have been queuing up today to outdo each other with their latest predictions for oil prices in the coming months.
So far the most eye-catching prediction has been for a move towards $10, while other forecasts have come down to around the $20 level, with longer term averages getting revised down to just below the $40 level.
For a historical perspective, that would be levels last seen at the beginning of 2002, when prices traded around the $20 level.
Calling the bottom in market is always a dangerous practice, akin to catching a falling knife
, but when the clamour for lower prices becomes a stampede, warning signs and alarm bells tend to start going off, which suggests that a more prudent approach might be advisable.
The first question to address is the trend, and for now it is unambiguously lower
with support coming in around the April 2004 lows at $29.95, with 2004 lows at $28. We would need to see a move back through $36
to suggest a turnaround in sentiment but the market is starting to look dangerously stretched. Can we go lower? Yes we can, but at these sorts of levels I’m not getting carried away, and $20 is still a long way away.
The main premise behind the arguments for further weakness in the oil market has been predicated on the belief that we could well see further strength in the US dollar,
as opposed to the impact of future Iranian production hitting the market by the middle of this year, if sanctions get lifted as widely expected.
Over the past two years the US dollar has risen 22% on its trade weighted index and with one rate hike already behind it the prospect of further rate rises later this year
appears to be fuelling a belief that we could well see a further move higher in the value of the greenback, and as such pose a further problem for US exporters. That is by no means a given and could cause the US dollar to fall back, undermining the premise of a lower oil price.
With oil prices at these sorts of levels it always pays to be cautious and take a step back
given that since the end of last year alone oil prices have slid over 10% already on top of the 50% decline we’ve seen since the May highs.
Another reason to be cautious is the fact that we’ve heard a number of calls for parity with the euro and thus far we’ve yet to see that particular prediction come to pass.
There comes a time when a trade starts to become a little crowded, and while we may not be there yet it’s starting to become a little difficult to see the wood for the trees.
Equity markets are still holding up fairly well above long term support levels
and while they continue to do so, particularly with the ongoing correlation with oil prices, it would be a little dangerous to start front running a sell-off when on a historical basis, oil prices are at multi year lows.
We’re currently seeing a bit of a rebound in the Chinese yuan after some significant declines over the past few weeks,
while we also have some important Chinese economic data due out over the next few days, including Q4 GDP and retail sales and industrial production for December.
An improvement in any of these numbers, as well as a stabilisation in the Yuan could well see sentiment change quite quickly in what is currently a febrile trading environment.
Levels to watch out for are the April 2004 lows at $29.90 on Brent crude, 5,840 on the FTSE100, and 9,600 on the DAX
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