oil could go further for ig

8/4/2019 Oil Could Go Further for IG

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22nd September2011

Oil could go further



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Fundamental

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Disclaimer


WEEKLY CHART

The market’s long-term chartsuggests that after the completion ofthe rising wedge created since Feb

2009, a move back to the majorsupports around $40 is possible.

WEEKLY CHARTThe wedge broke in June of this year.

But paused because of the supportfrom the two Prior Highs at 87.15,and 92.58.

That band of support broke in earlyAugust.

After the initial sell-off there was aslow rally… look closer at that rallyover the last six weeks…

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

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$41.15

$33.70

$39.99

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2008 M A M J J A S O N D 2009 M A M J J A S O N D 2010 M A M J J A S O N D 2011 M A M J J A S O N D

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$39.99

147.27 High

High 87.15

High 92.58

114.83 Hig h

$41.15 Prior High support from the Monthly continuaition chart

$33.70

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FUNDAMENTALS:

The peak in the oil market was reached in April/May this year, since then it hastraded steadily lower with the recent low of 75.71 made in early August.

The turning point for oil was the deepening of the Euro zone sovereign debt crisis inMay, and although a deal was subsequently reached with Greece to provide funds inexchange for austerity, the debt crisis has continued to deepen.

Currently Italy, France and Spain are in the spotlight. Italy is desperately trying toimplement an austerity program - at the same time as devising a plan to strengthengrowth ...

Spain seems to have won a reprieve. But France, or rather the French banks, arenow the main worry. Apart from a sovereign default, by Greece probably, traders arenow worried a major Euro zone bank will fail and cause a domino affect within not just the Euro zone or EU, but globally.

Clearly such an event would have serious consequences for the global financialsystem and world economy. Many analysts forecast such an event would be moreserious than the most recent financial crisis caused by the collapse of Lehmanbrothers.

If the global economy does slip back into recession, because policy makers bothpolitical and monetary have virtually used up all their weapons, the outlook for oil isbearish.




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FUNDAMENTALS: CONTINUED

Today’s move lower in this market has been sharp but not dramatic, leading to a false

sense of security.

Moreover, price action in oil has been closely linked to movements and sentiment inequity markets, so as stocks repeatedly tried to rally, oil found support.

We think that period of false security is fast coming to an end. Equity markets appeardisappointed by yesterday’s policy announcements by the Fed. A resumption of asset

purchases; “QE3” was expected, instead markets got “twist” which is a lengthening of the

maturity profile of the existing portfolio.

The Fed made it clear yesterday they saw the outlook for the US economy as weak.

The Bank of England minutes released yesterday also delivered the same economicassessment of the UK economy. While still expecting CPI to hit 5% this year, they nowsee all the risks to growth and inflation pointing to the downside. In fact, not only did theydiscuss restarting QE, but they also discussed cutting Bank rate from the already lowlevel of 0.50%.

The ECB clearly has a similar view of economic prospects as they recently abandonedtheir rate hiking cycle. A rate cut may not be that far off.

The global economy faces the risk of a recession that harks back to pre-WW11experiences, worse than the one recently experienced.

If it is that bad the oil price is very expensive compared to where demand will settle. Thistime round even China is worried. We judge the next major move in oil is down.

The Dollar Euro rally looks vulnerable



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