In recent months we have seen many rallies in the Oil price that have been unsustainable- mostly on the back of Geopolitical headlines. Inevitably those headlines have dissipated, and Oil has reverted lower. As a consequence of this and on the back of the technical setup since April I have been a consistent Oil bear.
But this time feels different both in the backdrop and technically.
The conflict is not going away. Israel seems emboldened by its successes, and it feels like these events are "the straw that breaks the camel's back".
All of a sudden, escalation to a point where other actors are getting directly drawn in looks increasingly a danger.
Yesterday there was a suggestion that the Israeli response will now focus on Iranian oilfields and or nuclear facilities. What's next? Iran causing an interruption of traffic through the strait of Hormuz? US having to decide to react?
In my weekly diary Diary-Week 61: Increasingly Complicated I suggested that these geopolitical events (Middle east, Russia/Ukraine, China etc.) looked increasingly in danger of becoming external catalysts that could feed back into the Global economy.
Technically we now have the possibility of bullish outside weeks on both WTI and Brent .
I am particularly focused on Brent on the chart below for a number of reasons.
It is in danger of posting a bullish outside week off the $70 multiyear support area if it closes this week over $75.87. (WTI will get one on a close over $72.40- but did not quite get to its multiyear support at $63.50-$64.00).
This would be the first bullish outside week since February when both Brent and WTI subsequently rallied over $10 over 4 weeks. That bullish outside week was also as a continuation of the trend while this one would be more aggressive and likely more impulsive if seen pretty much at the trend low off major support.
How high could Brent go If this completes?
A move to at least good resistance at $87.25-87.95 would be a logical target with interim resistance at $81.60 to $82.40.
IF that range was to give way it would open up a danger of accelerated gains towards the major pivot at $97.69 which would then look like the neckline of a double bottom.
A break above there if seen (at least weekly close) would suggest an extension as high as $115 for a rally of more than 60%
All of this, if it were to develop, is important for 3 reasons.
-This would clearly not be a demand driven move and would therefore be like a "Tax" on the Global economy at a time when consumers look increasingly "tapped out"
-In 2007 (My number 1 analog) Oil (Brent) started surging from late August rising from a low of $68.14 to $98.50 by year end (44%). It then consolidated in January before heading higher again. Then this was also not a demand driven move and had a very negative economic feedback loop in 2008.
-The failed Fed policies of the 1970's were not really as a consequence of bad policy decisions (Arthur F Burns gets a bad rap) but because Oil prices headed incessantly higher including during the middle-east Oil embargo (Oct 17, 1973) on the back of the Arab-Israeli war. Between Sept and Dec 1973 Oil rallied over 60%
As I always say, history does not repeat but it does Rhyme and Oil looks be on the cusp of playing a different tune
