Later today, I’ll be turning off the computer, picking the kids up from school, and joining the A303 in search of some half-term sunshine… I have a suspicion that I won’t be alone.
In fact, it’s not just every Brit who’ll be on the roads this weekend.
This Monday sees Memorial Day observed in the US. Traditionally a ritual of remembrance for US soldiers who have died in military service, it is also the beginning of the annual US driving season, when Americans head to the beach, the mountains, and the lakes for their weekends.
The US equivalent of the A303 is probably the Long Island Expressway, which takes New Yorkers to the Hamptons each weekend. It’s a road that locals describe as “The World’s longest parking lot”.
I’ll be thinking of them as I crawl past Stonehenge this evening.
I’ve alluded to the US driving season a few times in recent weeks.
Why?
Well, commodities in general – and oil in particular – have been one of the biggest stories of 2011 so far. All this has an effect on your trading, especially the price of oil.
And the US driving season has, traditionally, a big effect on the price of oil.
There are an estimated 250 million cars in the US, so when Americans head to the beach en mass – they get through a lot of gas.
The effect of oil price and why the driving season isn’t working
So, the driving-season theory is that demand for oil increases seasonally from May to August.
However, this year, there are some bigger factors at play …
We continue to get worrying reports out of China, and many investors are expecting a crash, at worst, and a significant slow-down at best. If it happens this year, oil demand and price will plummet.
Add to this predictions for a global economic slowdown, the debt crisis in the Eurozone, and current high oil prices suppressing demand …
Are we on the brink of a 2008-like crash?
The International Energy Agency reported that oil prices were “affecting the economic recovery by widening global imbalances, reducing household and business income, and placing upward pressure on inflation and interest rates.”
The long view
The commodities bull run has been strong over the past couple of years, as demonstrated in the charts I showed you a few weeks back.
But, of course, when it comes to the markets, when investors feel that they are riding a sure-fire bull run – that’s exactly when sudden corrections creep up on us.
We can find some perspective by looking at the long-term trend for oil since the 2008 crash.
The long-term bullish trend is still in place – the trend line hasn’t been breached. Nor has the 200-day moving average.
So, while the fundamentals are telling us that the current price isn’t sustainable, unless these support levels are broken, the long-term technical picture remains bullish.
The long and the short of it
So, what do investors really think about the oil price?
It would seem that oil investors are split down the middle.
The bears are citing weak demand and ebbing geopolitical risk as reasons for a fall to $75 …
… While the bulls are talking up oil shortages and potential supply disruptions, with figures like $140 coming our way …
Who’s right?
Well, they both have very good points.
Credit Agricole said it believed that if prices remained above USD 110 for longer, the world may end up no longer needing Libyan oil because of demand destruction from high prices.
“In our base case, which assumes no major destruction to oilfields in Libya, Brent prices are expected to return to USD 85 in the second half of the year,” the bank said.
However, Morgan Stanley, one of the biggest bulls in the market, said oil supplies could get very tight without any action from OPEC as demand from emerging countries remained strong.
Personally, I’m bullish about oil in the long term, but have serious concerns about its price strength in the short and medium term.
While political unrest is an issue, there is still only so much that struggling economies can afford to pay for oil before demand is seriously affected.
And the extreme volatility that we’ve seen over the past two months on oil means that we can expect a bumpy road ahead.
If we look at the daily candles for this month, there’s a descending triangle forming, showing that we are repeatedly failing to hit previous highs …
Watch this space …
In the next seven days
Concerns about economic slowdown may be abated next week when we get the purchasing managers surveys for manufacturing (Wed), construction (Thurs) and services (Fri). These should show that we’ve pulled back after the lows of a Bank-holiday-heavy April.
However, it would be wise to be cautious about any optimism. The European PMI figures out on Wednesday could show that growth has slowed down.
The US house price index on Tuesday is likely to show another fall. This would mean that prices in the US’s largest cities are 30 per cent below their peak – and more than 50 per cent down in Miami and Las Vegas. These are sobering numbers to any Brits bemoaning our 11 per cent slump.
Of course, we finish off the week with US non-farm numbers on Friday lunchtime.
