Oil markets draw a triangle

WTI Sept10.pngPeter Lynch, who managed Fidelity’s Magellan Fund in its great days, once remarked that “the futures and options markets are a giant transfer payment from the unwary to the wary“.

This has certainly been the case in oil markets over the past 18 months. The sale of futures contracts to pension funds and others, has taken prices far above anything justified by fundamentals, and made a considerable profit for those selling these contracts.

The issue, of course, from the chemical industry viewpoint, is whether this situation will change any time soon?

To answer this critical question, we probably have to turn to so-called ‘technical analysis’, which is widely used by those trading both commodities and currencies. It focuses on trying to identify behavioural patterns, not supply/demand fundamentals, and then applies these to current conditions.

Thus the above chart, from Petromatrix, is a warning that a possible major price move lies ahead. It charts the weekly range of WTI in recent months. And it shows a ‘triangle’ is being formed, highlighted by the red ‘resistance line’ at the top, and the green ‘support line’ at the bottom.

The triangle has been building since May, and suggests that ‘bulls’ have run out of steam in trying to push prices higher, whilst ‘bears’ have not gained sufficient momentum to take them lower. Quite often, the end of such a tug-of-war produces a major price move, up or down, as one side capitulates.

The blog will therefore keep an eye on developments, to see if the triangle pattern helps forecast future price movements on this occasion.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

2 Responses to Oil markets draw a triangle

  1. Ray Adams 22 September, 2010 at 5:43 pm #

    So the price is either going to go up or down? That’s like saying the Phillies are either going to win or lose their division.

  2. Paul Hodges 23 September, 2010 at 7:57 am #

    Ray

    Thanks for the comment. But the answer to your question is, not really.

    If you want a sporting metaphor, think of two boxers in a ring, hitting each other for all they are worth. This is what has been happening in oil markets for the past year – one side says the economy is recovering, there are major geo-political risks etc, and so the price ought to be at least $90/bbl. The other side says nonsense, there’s no real recovery happening at all, stocks are at record levels, and there’s plenty of new supplies incluidng alternatives such as ethanol.

    So these two forces have been battling it out, producing a very uneasy equilibrium, with prices locked in a $70 – $80/bbl range for most of this year.

    But now, the triangle is siuggesting, we are in the final round. Both sides are so tired, they are no longer moving round the ring, but just slugging it out, landing blows on each other. The theory (and I stress we are talking about sentiment and psychology here) suggests that if one lands the knock-out blow, then prices will go rapidly in their direction. So as I say in the post, we are talking about a “major move” here, outside the $70 – $80/bbl range.

    On the upside, we could go to $90bbl or more, or on the downside to $60bbl or lower. Either would have a big impact on the chemical industry.

    Hence the post – the risk is high enough, that its worth companies thinking through what they might do, if either outcome did occur.

    Hope this clarifies.

    Paul

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