Why The Middle East Is About To Blow Sky High

From Bloomberg (09 October 2015):

Oil surged above $50 a barrel in New York for the first time since July on speculation that demand is picking up.

The US Federal Reserve released the minutes from its September meeting last week. It made mention of the oil price 14 times. Low oil prices, it says, will prevent any inflationary pressures building. Along with a stronger dollar and concern about China, it provided another excuse to push back on an interest rate rise.

Last Friday, the market realized the Fed wasn’t going to raise rates anytime soon. Since then, the price of West Texas crude oil has soared nearly 10%.

Bloomberg says it’s on ‘speculation that demand is picking up’. That’s rubbish. It’s on the realization that easy money will persist for longer than expected.

But the recent rally doesn’t change much. The overall trend in the oil price is still down. As you can see in the chart below, the oil price plunged from over US$105 a barrel in mid-2014 to around US$45 in early 2015.

Six months later it recovered to just over US$60, before rolling over and making a lower low around US$38 in August this year. As you can see by the moving averages, the trend is still down. This could be the bottom and the start of a new upward trend, but plenty of people bought in earlier this year thinking the same thing.

Buying against the prevailing trend is a risky strategy. I’d rather wait and buy at higher levels, with less risk. For example, if the price continues to advance and breaks through the recent highs around US$60, I’d feel more confident that the trend had changed.

Until that happens though, I’ll stick with the downtrend and suggest this is just another bear market rally.

Oil prices are fascinating not only from an economic perspective. It’s the geo-political angle that makes oil a really interesting, if tragic, commodity. This is where the energy story becomes really complex. And Saudi Arabia is at the heart of the complexity.