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Oil lower, volatility market reaction. Oil now showing price instability. Could the mother of all oil shocks be brewing?

Posted by Adrian on August 13, 2008

It is extremely hard to find correlation in the market and connect them to other market forces. Other times one can make ‘assumptions’ and interconnect markets. One example is the slowing global economy and the lower oil price, which in some ways is to be expected, especially with demand is slowing in the US and oil supplies appear to be replenishing. China’s slowing down after the Olympics is still speculation, but with the global economy contracting rapidly in the last month – China is slowing more rapidly than expected. Even prior to the Olympics. Yet still Chinese oil demand is up 8.3 million barrels per day, from 8 million (June 2008 ).

So is the recent drop in oil price and indicator that the world is heading into recession?

With the market selling oil, thus bringing the price to 113 (13th august 2008 ) from 146 (15th July 2008 ); what has come into play is several situations, the rapidly slowing European economy, the slowing Asia economy more particularly Singapore and Japan and of course the stagnant and recessionary economy of the US. The European EUR has now gone into retreat under the belief the European Central bank will cut rates. The US dollar has rallied against the high yield currencies as they have declined. But oil output is still high, with OPEC pushing levels to 48yr highs; pledges from the oil countries such as Saudi Arabia to increase output have still yet to eventuate in earnest. No new oil fields have been explored and existing oil fields are struggling with out put. Iran is still is a major player, I suspect they can call the West and Israel’s bluff.

120 was the support, but oil dipped rapidly due too little damage to the Georgian oil pipe lines (Russia’s invasion), US slowdown/demand and so on. The US stock market has been in such a flux of volatility and continues to do so. The new support is now 110, but in my opinion the oil price is showing price instability – the sell off has been a running of funds out of the oil market. Can oil prices collapse near term? Possibly. If liquidity is being run out of the oil market through maybe fear of over regulation and other market factors, we could see oil prices jump all over the place – and go lower.

Despite the theory of speculators and liquidity propping up oil prices, it should be noted that a psychological support will be $100 a barrel. Any lower and we may get an oil shock straight back up into the high 100’s (surpassing the oil shocks that occurred in the 1970’s), mix in a conflict and it could go to $200 year end.

Artificially dragging the oil price lower, from either fear of regulation or panic selling could pose more danger than a sustained high oil price. Like I said earlier, the 100 price most probably will force the market to stop selling.

The oil/futures market is a hard market to speculate in, but there does seem to be some price stability now with the falling oil price. Which could be the new support of 110.

please refer to graph(click on for larger image):

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6 Responses to “Oil lower, volatility market reaction. Oil now showing price instability. Could the mother of all oil shocks be brewing?”

  1. […] players would attempt it, but oil dare not come under the same sell off. As mentioned in Oil lower, volatility market reaction. Oil now showing price instability. Could the mother of all oi…, anyone shorting oil will have their balance sheet destroyed and I imagine some people also got […]

  2. […] effect the oil price far more dramatically than speculators in the futures market, as discussed in Oil lower, volatility market reaction. Oil now showing price instability. Could the mother of all oi…; the oil price should stabilize in the 100 -110 range, this is due to market dynamics of liquidity […]

  3. […] pricing – that appears to be pointing to a large spike at some point in the future (please refer to:Oil lower, volatility market reaction. Oil now showing price instability. Could the mother of all oi…). The US export markets are solely contributing to the US GDP, but for how long? If the USD […]

  4. […] as I mentioned in Oil lower, volatility market reaction. Oil now showing price instability. Could the mother of all oi… the oil price is becoming unstable with new lows. Iran and Venezuela have requested that Opec cut […]

  5. […] comments As I discussed in the post Oil lower, volatility market reaction. Oil now showing price instability. Could the mother of all oi… Analysis was made arguing that the oil price is showing price instability as it fell heavily from […]

  6. […] discussed the potential of an oil price spike in Oil lower, volatility market reaction. Oil now showing price instability. Could the mother of all oi…, this was on the premise that Israel would strike at Iran’s Nuclear facilities in 2008. This […]

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