Geopolitical OIL

If there is something that can take oil up or down, it’s the geopolitical risk. Is it? The top news now says that, “Crude oil may fall next week after Iran’s release of 15 British naval personnel eased concern that shipments from the Persian Gulf will be disrupted; 48 per cent of oil analysts said oil prices will decline, 25 per cent said prices will increase and the rest said they will be unchanged.” This means that if geopolitical risk is the biggest driver for oil then there are more reasons why the asset should fall. Well we have proved this time and again, how weather, Iran or geopolitical risk cannot really predict (accurately and consistently) where prices will go tomorrow, next week, next month or next year. We can try explaining this again.
On March 12, around 10 days before the incident, this column said, “Though we maintain our bullish view on oil, timing the purchase is what matters most. We still need more confirmation to consider the oil fall from August 2006 to January 2007 as the end of the oil bear move. We would give the commodity till the end of March to tell us if it’s done with falling.” Oil has clearly moved above a key 50-day moving average. The last time this happened was in July 2003. Oil was above this nondescript rolling line till July 2006.
This means two things, either the geopolitical risk continued to increase over the last four years, the very reason prices never actually fell, or the rolling line understands oil more then analysts do. A simple ‘Buy’ in July 2003 with a month long confirmation would have kept us away from all noise. Current prices have made a clear attempt to move above the rolling average. And it seems that apart from all the news, a support here above the average might be all that we need to take oil from 60 to 100. And as we mentioned last time, the energy asset has a four-year cycle, which bottomed out in 2006. The next cycle should move on till 2010. Our Preferred count still looks up and considers the break on 50 day moving average, momentum confirmation, log channel support (Slide 2), oil cyclicality and intermarket conformation from S&P Energy Index, as positive signs. However, on the Alternate count the bottom formation still seems to be wanting. First the fall from the top has not completed 9 months, which makes the current move intermediate and not of primary degree. This means the 4 primary (A)-(B)-(C) might continue for some time before oil actually bottoms. Second, we have the WTM (Midland), which unlike Brent has not closed above the 50 period moving average. WTM still is below key levels to call it over.
While we might still need more confirmation on oil to rule out the alternate count completely, natural gas is ready to move up. Our Nat Gas target remains above 20 for the asset. We have detailed other related Indices and ETC’s to validate our case. Energy remains poised at a significant juncture. How geopolitical situations predict oil is a tough call, but reading interpretations should be definitely interesting weekend reading.
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