My thanks to dachestmeister for putting me on to this thought!
A funny thing happened on the way to $70 oil yesterday.
The dollar jumped up on Fed tightening on the exact same day that oil was gapping up towards $70/bbl. This caused oil to actually decline for 2 days, just as it was poised to make a new high.
US traders don’t think about the dollar at all and see yesterday’s action as a technical failure to break $69/bbl. This coupled with the fact that we are, in fact, swimming in oil can easily send prices below $65 this week or next. That, in turn will cause the weekly chart to look like we made a lower high for the first time all year which could lead to a total collapse to $60 or less!
http://stockcharts.com/gallery/?%24wtic
On the daily chart you can see how the above circumstances accidently formed what they call a double top, just under $69. This is a devastating sign to chart watchers! Even worse, yesterday’s price gapped down as the dollar effect hit before trading opened, and the price never moved up into the gap. This movement came in spite of what the traders felt was pretty bullish (for oil) news from Iran.
Now the world is made up of all sorts of traders – Momentum traders, fundamentalists and chartists being the main groups.
The fundamental players are split into two camps. There are the Chicken Little “peak oil” types who say we are running out of oil (we are, some day) and the ones who actually look in the tanks to see how much oil we have today vs. how much we need for the week/month/year…
The momentum players don’t care about anything except which direction the volume is taking them, this strategy is great if you have millions of dollars worth of computers to track things with.
The chartists are like momentum players but they are looking for discernible patterns that evolve over time. Human beings are hardwired to look for patterns in everything, like the people who write down what numbers previously hit in roulette in order to predict the next number.
Funds are ruled by chartists, that is the reason I pay so much attention to charts… While I think the logic is flawed, I accept to the fact that everyone else has so much faith in them that they must be taken very seriously.
The trick here is that you have a confluence of events that may take oil down fast. The price is already fundamentally flawed so the technical failure on the charts may be seen as a hard top and another day to the downside will cause the momentum players to jump on board.
Traders worry that the fear factor may be fading. Commodity players are well aware of the premium for fear that is priced into the market at the moment and no one wants to be left holding the bag when everyone regains their sanity. If oil fails to “fill the gap” that it made yesterday, moving back over $68.25, then the support falls all the way down to the 50 dma of $62.
The mitigating factor today is the continuing Iran “crisis” as the UN Atomic Agency is about to decide whether to impose “sanctions” against Iran. “Oh no,” say the traders, “If they impose sanctions Iran might stop selling oil.” This is as likely as if you grounded your teenager and they refused to accept their allowance just to show you!
Iran is not going to stop selling the only thing in their country that produces income. They may symbolically not sell it to the US but, if they sell it to China then we buy the oil that China was buying from someone else. I wish they would do it because there is, in fact, plenty of oil and if we survive a cut-off by Iran then much of the current panic would fade into the background.
It looks to me like Iran will defuse. Carefully worded comments are coming from both sides:
Iran says they will not give up “peaceful uses for atomic energy” and Bush is saying we cannot allow them to have “atomic weapons.” That means the door is open for a monitored nuclear power plant.
If that happens, the oil market will fall so fast it will make your head spin!
There are about 1,500 active oil tanker in the world. At any given time 750 of them are full of roughly 2M barrels of oil (probably more as they go faster when empty) meaning 1.5Bn barrels of oil are currently on the way somewhere.
Iran produces 2.6M barrels a day. While this is substantial, it is less than 3% of global production and just 1/700th of what already on the way to market. It would take 70 days of total shutdown to affect 10% of the oil supply (and that is the very worst case). During that time, Iran would be losing $180M per day.
http://www.eia.doe.gov/emeu/cabs/pgulf.html
Now even a James Bond villain can just go out and buy a bomb for $180M, if Iran wants a bomb, they can certainly get one. If they can’t, then everything they tell you about a potential terrorist threat is a lie. If a sovereign nation with Billions of dollars can’t get a hold of a nuclear weapon, what is the real threat we face from cave dwellers?
I am no fan of Iran and I think it would be terrible if they do have atomic weapons but maybe, just perhaps, they see this from their point of view as more a matter of principal – a way to elevate their status on the world stage and not a prelude to nuclear war.
On a lighter note, oil is going to begin trading in Euros as well as dollars on March 20th. This is a first and, if it catches on, demand for dollars could plunge (people use dollars to buy oil) and demand for Euros could skyrocket. This may be Bernanke’s first Fed crisis (assuming we go a whole 2 months without some other crisis first) and it could be a big one!
$6Bn per day are used to buy oil. Assuming a 45 day turnover/inventory cycle that means $270Bn are out of circulation at any given time. If 1/2 of that oil money moves to Euros, then $135Bn will come back into circulation, that is roughly 10% of the M1 money supply (cash on hand + checks) but only 1.5% of the $8T M3 (all US dollar denominated assets).
Still, your worst case scenario is a 1.5% inflation spike in a single quarter causing a 1.5% rise in commodity prices and a 1.5% drop in US stock prices.
We’ll have to keep our eye on this one!
