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Oil prices remain in their triangle

Chemical companies, Economic growth, Financial Events, Oil markets
By Paul Hodges on 27-Oct-2011

Brent Oct11.pngA year ago, Petromatrix highlighted the short-term ‘triangle’ that was being drawn by oil prices. This describes a period when sellers and buyers are evenly balanced, and neither side can gain momentum to take prices in their favoured direction.

It usually leads to a sharp move, either up or down, when one side wins.

At that time, Brent was ~$60/bbl. And the ‘triangle’ was eventually broken by the bulls, using liquidity provided by the US Federal Reserve’s QE2 programme. The move led to a doubling of oil prices, as buyers had to scramble to obtain supplies.

Now, as the blog noted back in June, a longer-term triangle is busy tracing itself out. The chart above highlights the peaks from 2008 and earlier this year. Its downside is the green ‘support line’ that has marked the bottom of the range since then.

Last year, the US Fed’s $600bn QE2 stimulus provided the cash to fund the surge in the oil price. So far, its new replacement Operation Twist seems to have provided less firepower, although prices have risen $10/bbl since it was announced last month.

China oil Oct11.pngHowever, demand continues to slow under the influence of today’s high prices, which have always led to recession in the past. In particular, the Reuters chart above shows China’s implied oil demand last month was up only 0.6% versus September 2010.

Traders will clearly try to maximise their year-end bonuses by pushing prices higher again. But the fundamentals of supply/demand are even less supportive than last year. The blog will continue to watch the triangle to see what may happen next.