Last week has been great for investors long oil contracts as it had the perfect close; breaking the $75 resistance and shooting up again in the next trading day.
The million dollar question is will oil continue to rise? I’m not an expert in commodities, but I have been talking to experts in the field and they DO believe that the rise in oil prices is sustainable.
The three catalysts supporting this jump in oil prices:
1) The USD is expected to decrease even further. Central banks rate paths are expected to differ and the pace of the recoveries will not be aligned. This will result in an increase in the imbalance between the economies which support the belief that the USD is not oversold, rather it is eliminating past gains on the index following its downward trend.
2) The global economy is improving. Wold trade has a better outlook supported by the recent surge in Chinese export figures for September which beat expectations.
3) Q3 earning beats. Intel beat estimates by a bold USD1 billion figure, due to the increase in international sales (Asia). IBM, Google, and JP Morgan also beat earnings estimates. A low US dollar will help the US economy by supporting its exports. US companies to continue to report good earnings, thus, adding disposable income to the consumers to simulate the economy again.
As oil prices increase, many economies will share its fortune. I posted a while back about the correlation between oil prices and the Saudi Stock Exchange “What Moves the Saudi Tadawul Index?” and we calculated that they are highly correlated (0.8). As seen in the chart below, the Tadawul index has also broken its resistance of 6,100 and retracing any losses that occurred since October of 2008.
Rajhi Bank (1120) is one of Tadawul’s large caps. The banks broke resistance and is trading at their all year high levels.
and also Sabic (2010):
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Loading ...Tags: Al Rajhi Bank, Improving Economy, Oil, Oil breaks $70, Oil prices rally, Sabic, Saudi Tadawul correlation with oil and dow jones, US Dollar, US Dollar breaks down, USD
Up until last week, the main driver behind oil’s breakout has been the fall in the US dollar. Oil is inversely correlated with the dollar as oil prices are dollar denominated. Also, as the dollar slumps investors buy oil and other commodities as an inflation hedge.
It is evident from the chart above that oil has failed to break the $76 level for a while and this move is considered extremely significant. The technical breakout in oil is a reconfirmation of a bullish trend especially since that happened on a day when the dollar strengthened. The rally in oil was mainly driven by a more fundamental story: lower than expected crude oil inventories coupled with good earnings and bullish news from China.
I say SUSTAINABLE
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no matter what you do, don’t trust the so-called analysts and pundits. here is a good example. in todays (19th october, 2009) alwatan daily (kuwait), kamel al-harami says:
“Happy days are here for oil producing countries and are here to stay. Oilـproducing countries will be celebrating end of the year with huge surplus cash in their treasuries.”
http://alwatandaily.alwatan.com.kw/Default.aspx?MgDid=806104&pageId=476
and here is what he said earlier in the year on march 9th, 2009 in a column titled “Don”t bet your money, oil prices will not go up”:
“In the near future oil prices in no way will pick up and go beyond $50″
http://alwatandaily.alwatan.com.kw/Default.aspx?MgDid=732154&pageId=476
now i am sure the guy was speaking his mind with conviction but it is dangerous to assume the sagacity of anyone with a soapbox and it would have been dangerous for people that followed with their money.
for reference, mr. al-harami is qualified as an ‘independent energy analyst’. probably going to stay independent for a while.
gluck.
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Saud Reply:
October 19th, 2009 at 4:00 pm
hahah good observation
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Keynesian Reply:
October 20th, 2009 at 2:34 am
Good point. Analysts always, “Close the stable door after the horse has bolted.”
It is a major amateur mistake to have total conviction in analysts. This is why one should always weight different points of view and then come up with their own independent decisions.
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Tadawul Index closed 2.11% up; Sabic, good earnings resulted in a 6.33% increase; Rajhi 1.3% up
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Hey! Quit ragging on analysts! Besides, making investment decisions independently can be totally overrated when you don’t know scrap.
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Keynesian Reply:
October 20th, 2009 at 4:59 pm
Lol.. I guess the point is weight analyst opinions, BUT ultimately come up with your own opinion. As for ppl who don’t know scrap, give your money to a professional. The problem is that in Kuwait finance professionals tend to underperform people who don’t know crap because of inefficiency of the market (insider info).
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I couldn’t agree more. Sad but true…
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