Did I hear you correctly ? Oil in a bull market ? Surely not .....

Tuesday 1st September 2015

Did I hear you correctly ? Oil in a bull market ? Surely not .....

Ref :  "Oil Prices Surge Amid Lower US Output Estimates, OPEC Article" , The Wall Street Journal

Anyone who had been away for few days might think on reading the headlines that they were having their leg pulled. Certainly, they could be forgiven for wondering whether it made any sense. Crude oil markets have rallied by 27% in three trading days (though at the time of writing they're down 3.5% today) .... technically speaking, a rally of 20% from the recent low puts markets in "bull market" territory.

So what's changed, fundamentally ? Actually, not that much. The triggers for much of the move were two-fold. In the US, the Energy Information  Administration (EIA) reported that production had fallen from 9.6m barrels per day in April to 9.3m bpd in June. Of more weight was an article in the OPEC Bulletin suggesting that the organization stood ready to talk to all producers both within and outside of OPEC with a view to cooperating on achieving "fair and reasonable prices". But triggers aside, the moves smack of a classic example of a short-covering rally, albeit a very sharp one. This is what can easily happen when too many speculators get on one side of the market. In this case, assailed by a constant stream of data signalling over-supply and tepid demand, and watching a sharply down-trending price, they've put their money on yet further falls .....which makes them vulnerable. Any significant move to the upside has them scrambling to cover their short positions, which can in turn lead to much larger price rises, especially in thin conditions.

What are we to make of those two triggers, then ? Best advice : treat them with a great deal of caution. Analysts point out that the EIA is using a new reporting system which is so far unproven, and the OPEC statement is something you would expect an organization representing oil producers to say but contains no specific plans or dates. Ultimately any deal on cutting back production quotas must be at the instigation of the Saudis, and even if the effects of $50 oil are not entirely comfortable (even for them), they have shown no sign of any flagging determination in the pursuit of market-share.

So theoretically and technically, it's a bull market, though fundamentally it still FEELS bearish .... interesting times. What you can say is that the sudden rebound in prices may in the future discourage some of the more aggressive short-selling. And it would be sensible to assume that the recent spike will not be last we see, particularly as we approach the OPEC meeting in early December. But as for any real change in the fundamentals ? Not yet.....

Remember this week .......

We shouldn't forget that the board of the European Central Bank meet on Thursday, where among other things they will discuss the suggestion that their Quantitative Easing programme should be extended / expanded.

But if you only catch one piece of data this week, make sure it's August's US labour situation report, released on Friday. This is the most important report between now and when the Federal Reserve meets to make their decision on when to hike rates. Whether recent global market turmoil supersedes any one set of numbers we shall to wait to discover, but obviously the implication is that strong data supports a move in September, weak data a further delay. So,

Non-Farm Payrolls           :  Consensus estimate +223,000  (last +215,000)

Unemployment Rate        :  Consensus estimate 5.2%  (last 5.3%)

Average Hourly Earnings :  Consensus estimate +0.2%  (last +0.2%)