Peter 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.