FT has been trading full time from home for two years, with nothing but four kids and a beach to distract him .
He fills his spare time with weight training and rugby, though more coaching than playing these days.
FT mostly trades the forex markets and although he plays FTSE on occasions his bread and butter market is £$.
He likes to think that his technique is evolving but still hasn’t the temperament or money to back the big calls. He prefers to trade between 1 and 3 times a day, aiming to take regular small gains, but feels part of the evolution is in not dealing if the conditions don’t feel right.
Where Next For The Oil Price? Part 1
The past week has seen a tentative return of risk appetite. The major equity markets have rallied by around 12%, Sterling has regained almost 700 pips against the Dollar and that paragon of safety, the Yen, has lost 700 pips against the Euro. Even schizophrenic gold, no longer a sure-fire safe-haven, has rallied over $100 from the lows.
But there’s someone missing from this happy reunion of risk assets, oil. Down 65% from its July high, with the world in recession and demand falling, oil is hovering around its 2-½ year low. The only need we have for it these days is to keep us warm at home whilst scanning the job pages in the paper. Even the chart looks bad.
This weekend members of OPEC are holding an emergency ‘consultation’, ahead of their official December meeting, to discuss further cuts in output. So with oil bubbling just above the $50 level I thought it’d be useful to kick a few rigs and see just how bad things are. Today I’ll be taking a look at the main influences and concerns over supply and demand and then tomorrow I’ll be looking at what else could influence the price and suggesting how I might trade the current situation.
But just before I start, if you’re new to the oil scene, why not grab a coffee and have a breeze through our beginners’ guide How To Trade Oil-The Cruder Way.
The Oil Price
In July the oil price peaked at $147 with several analysts tipping a short-term target of $200. Since then, three main factors have been responsible for a 66% fall to just $50:
1) Global slowdown. Sure, it was already happening, but it took a bit longer for the oil barons to wake up and smell the espresso.
2) The Dollar turned from least to most favoured currency; because oil is priced in Dollars a stronger Dollar means that even if the oil price falls it can maintain its value against other currencies. For example, if oil is priced at $140 and the EURUSD rate is $1.61, then oil is worth €87. If the EURUSD rate falls to $1.30, then oil could fall to $113 and still be worth €87. Of course, it’s fallen well beyond that now.
3) Many speculators, in particular the hedge fund community, suffered a lethal dose of massive investor withdrawals, and higher margin calls from their brokers. This had the effect of forcing speculators to sell ‘at any price’.
Over the longer term the price of oil is determined by supply and demand , so we will start by looking at each of those in turn:
Demand
The queue of Cassandras cutting their forecasts for future demand is longer than the one when my local petrol station dropped the price below 100p. In close succession we saw:
The International Energy Agency cut its forecast for demand for both 2008 and 2009, and its price assumption from $100 to $80 for 2009. However, although the IEA cut its forecasts, it still sees an increase in demand going forward. The agency is projecting an increase of 120,000 barrels per day (bpd) for 2008 and a rise of 350,000 bpd in 2009.
The Centre for Global Energy Studies said that a year on year decline in global demand for oil in 2008 and 2009 was ‘a very real possibility for the first time in 25 years’.
OPEC cut its demand forecast for 2009 for the third consecutive month, to 86.68 million bpd. Click here to find out more on OPEC and its effect on the oil business.
China said its imports of diesel dropped to a 14-month low in October. To make matters worse, forecasts for future growth in China were revised down; the World Bank has just cut its 2009 forecast from 9.2% to 7.5%.
And to top it all, the world’s largest importer of oil, Japan, confirmed it was in recession.
Supply
The International Energy Agency warned that the world could face a major oil shortage by 2015 if investment in new capacity isn’t increased. OK, so we’ll have had two more football World Cups by then, but the markets will be ahead of that in their pricing.
Production from many existing fields is already falling faster than anticipated; fields in the North Sea, Alaska, Russia and Mexico are suffering faster than expected declines.
And with prices falling there’s less incentive for companies to undertake expensive investment in exploration and production ventures. Canada’s oil sands were profitable when oil was $100-$150 per barrel, but $50 per barrel makes that investment decision less clear-cut.
In November production by OPEC (ex-Iran) fell by 1.22million barrels per day, less than the amount of 1.5 million bpd agreed in October. This suggests that not everyone is playing ball; some members haven’t cut their supply by the agreed amount. This happens all the time, but makes a mockery of calls for further cuts.
So what we’ve got at the moment is falling demand, with the prospect of this carrying on in the short term, and falling supply, which isn’t much of an issue at the moment. The problems will arise when demand picks up and everyone realises that there’s no quick way of turning the taps back on. The big question is, when will traders start to bet on this happening?
Conclusion
Longer term, it’s all looking gloomy for oil. Demand is falling and although supply is falling a lot of countries still want to sell more oil to help balance their books. However trading is not only about the longer term, the short term counts even more. Tomorrow I’ll put out the next piece about what factors might affect the oil price in the short term and how I’m looking to trade it.
November 28th, 2008 at 10:04 am
The past week has seen a tentative return of risk appetite. The major equity markets have rallied by around 12%, Sterling has regained almost 700 pips against the Dollar and that paragon of safety, the Yen, has lost 700 pips against the Euro. Even schizophrenic gold, no longer a sure-fire safe-haven, has rallied over $100 from the lows.
Since gold is a safe haven wouldnt you expect gold to fall not rise in the event of risk environment manifesting itself again. Fear, inlfation and fiat currency distrust causes gold to rise. If people move money into risky assets you’d expect gold to fall back not increase…
November 28th, 2008 at 12:27 pm
Hi JS1
yeah, I agree with some of that, but as I mentioned, gold has had a confusing time recently. It lost its safe-haven status (temporarily) when the hedgies knocked 7 bells out of it. As a hedge against the Dollar weakening and inflation it lost its appeal. I think the argument goes that as the Dollar was a beneficiary of panic re-patriation of funds, it will lose out when risk appetite returns. If traders expect the Dollar to weaken, and many do every time they look at the Fed balance sheet, they buy gold. Also, although we’re entering a period of falling prices, some long term investors are looking at all those dollars, euros and pounds sloshing round the system and thinking about a nasty bout of inflation some way down the road.
November 28th, 2008 at 2:02 pm
Hi FT,
Can we expect the bears to take control again next week just like what happened after late October rally. I think that this rally is very unlikely to be sustained even over the short term. I think that def over the next 2 weeks we will see equities come back to test the lows of Oct/Nov again. Any thoughts?
November 28th, 2008 at 4:34 pm
Hi CM,
I’m with you in the bear’s enclosure, but just a bit cautious about timing. Firstly, the S&P, Dow and FTSE have worked hard to get back above their 14 &21-day MAVs; I suspect a lot of technical traders won’t want to go against that. Secondly, December is a strange month. Think of the effects of recent month-end re-balancing and turbo-charge it. No, I’m not predicting a huge rally, just warning that a lot of adjustments are made across investment portfolios in December. Strange creatures called Actuaries only come out of their coffins in December to look at assets, liabilities and risk factors, then just as the markets are winding down for Christmas they order huge portfolio shifts. Add that to window dressing, re-balancing and we could see some fun and games.
So that’s the risk, that markets are governed by strange forces, alien to what’s happening in the economy. Yep, I reckon we’ll see new lows (I’m not writing any put options this month) but I’ll wait for some sort of trigger or reversal signal before putting my shorts back on.
Have a good weekend
November 28th, 2008 at 5:59 pm
CM,
the 50 day mav on FTSE is around 4365; bulls might try and take it up there. Or , if we’re lucky, we’ll come in and have a sniff of the coffee and take notice of what’s happening in the real world.
November 28th, 2008 at 6:24 pm
Hmm, a big squeeze. Interesting, depending on how carefully you draw your line, the Dow finished at the downtrend line. October’s rally was approx 20%, 1600 points, followed by a 2150 fall. End November rally approx 18%, 1370 points…….
I can see arguments both sides, but would find a sell-off of that magnitutde more fun. Just been updating my diary, nxt week is pretty busy. Not only two rate cuts, but US payrolls and bags of sentiment data. And I guess we’ll start getting indications of how black Black Friday was in the US.
November 28th, 2008 at 6:31 pm
Well, I can see the argument for a retest of the lows but in my usual irritatingly contrarian fashion I think we could go much higher yet. A lot of the serious money won’t yet have come back into equities but if markets can hold this winning run then they will be tempted in. I mean – some equities are now substantially off their October lows, The data is awful but I think there is some evidence that the fiscal stimulus etc is working through – UK house prices stabilised a bit in Nov – the interest rate cuts will put more money in people’s pockets, and overheads are coming down as the oil and commodity prices have plummeted. And a nasty recession is now priced in – whether its a fair price depends on how severe you think the recession is going to be.
Plus we’ll have very interventionist governments on both sides of the atlantic come January and the US seems hell bent on spending every last drop of public money trying to avert a depression. (which could be tricky for the dollar – but what other currency would you buy instead?) So I’m staying cautiously optimistic – and that stance has made me plenty of cash this week – have taken a bit of profit on my equity longs and a chunk on my gold trade today, but I’m sticking with my view for now.
Reversed my view on gold – very indecisive, very poor trading discipline. Have reinstated a gold long at 815. We’ll see.
November 28th, 2008 at 6:47 pm
Hi flash,
yeah, this one ought to attract a healthy debate; I can see the argument for a Christmas push (as per above), but more on the technicals than economics. Reckon the job loss momentum is only just building on both sides of the Atlantic. Also, I can accept the textbook theory that Darling Alistair’s money ought to stimulate the economy, but if I pretend to be a normal person I didn’t see much (anything) to make me go out and start spending. 2.5% off VAT, big deal, there’re bigger savings just by checking around/ using the ‘net or clicking on for discount vouchers. Interest rate cuts-sure they’ll feed through in time, but as far as I can see credit cards and existing loans ain’t coming down much yet. And I reckon house prices have to fall more to attract buyers (that’s normal people on 20-30/-. I’m not sure what multiples the banks that are open are using, but it still requires a fai old deposit.
Gold, yep I haven’t a clue. Notice gold and oil have spiked in late trade. Does someone know something about the meeting, or have the big boys been reading my blog!!
The Euro view’s working, albeit the move using EURGBP. Might be tempted by the bolder €$ play nxt week.
Enjoy the weekend
November 28th, 2008 at 6:48 pm
Thanks for that FT. Really good help as always.
November 28th, 2008 at 9:36 pm
Has anyone taken note of the volumes traded in the last few days of this ‘rally’…..decreasing dramatically as the week went on. Also, the DOW has gone up over 1200 points, from it’s low a few days ago, but by my numbers it’s still on a ’sell’.
Next week will be very interesting with the thanksgiving weekend shopping results out. Of course the ‘official’ retail results will probably be good in terms of sales as the shops opened their doors at the stroke of midnight and will be open virtually every minute of the weekend. Would be interesting to know the real profit with retailers heavily discounting to get people in.
Anyway, we will see how this rally pans out when we start getting some real news again next week.
Did anyone see the BBC2 programme, American time bomb, this week. Truly scary stuff with the US debt of staggering proportions and getting worse by the second. Well worth watching.
GP
December 1st, 2008 at 8:35 am
Hi CM, opened a cautious FTSE short this morning at 4240 (yeah a bit late in the move). I’m not convinced yet and I’ll be looking to trail a tight stop on this one.
December 1st, 2008 at 8:39 am
Yeah, volumes were non-existent. I reckon we should just ignore last week’s price moves.
Interesting this morning that FTSE has turned back at the downtrend line forming the top of the wedge I mentioned last week. The bottom of the wedge is down in the 3700s. A breakout one way or the other must come soon, if it is to play out.
I’m still inclined to be long (for the short term) but I’m not ready to put any money on that just yet.
December 1st, 2008 at 10:50 am
Trade going nicely for ya so far FT. I’m short BHP at 1147(stop at 1200). I like the look of this one, its finding it difficult to break through its resistance levels and looks good on the RSI.
December 1st, 2008 at 11:23 am
Stopped out of FTSE at 4188. I’ll wait now to see how it deals with 4200. BHP looking good; chart wise lthe sell trade looks to have a good risk/reward balance.