Let us look at crude oil today. In fact, a whole lot of people are probably looking at crude oil today. That is because another outbreak of riots in the Middle East is influencing the price of oil. It was Tunisia, then Egypt, then Iran, then Bahrain, and now it is Libya.
Libya is a member of OPEC and sandwiched between the freshly shook-up Egypt (where the Muslim Brotherhood is active and apparently influential to its Libyan neighbor) and Tunisia. An uprising in an OPEC member nation alone is enough to fuel supply concerns. But when you have a tribal leader spewing ultimatums like this – “We will stop oil exports to Western countries within 24 hours” unless they see an end to the “oppression of protestors” – then people are going to take notice.
It is estimated up to 50% of oil supply to Europe flows from Egypt and Libya. Not pretty!
Crude oil’s reaction to geopolitical turmoil is common, especially when the Middle East is concerned. But oil has been behaving rather strangely in the face of fairly consistent uprisings in the region. Let us see if we can make something of it …
There are three boxes in the chart below.
The black box shows where crude oil sold off and broke through its two previous low points.
But then, with the Egypt scare, crude oil jumped back twice as fast to test its old highs … per the blue box. But that is all it could must, as crude sold off quickly again. This sell-off brought it through its previous low point.
The red box shows the most recent reaction to geopolitical concerns. There is a glitch in our charting system at the moment, but the March futures crude oil contract is actually trading up near $90 … near the top of the red box.
Anyone bullish on crude oil has until today probably been a bit worried. Follow-through from today’s price action is critical.
Going back over the last year or so, crude oil has somewhat underperformed the majority of the commodities block. That is likely because not until the end of last year did there begin to be any indication of short supply or surging demand. Over that time demand growth was rather stable and the world was “well supplied,” as OPEC officials like to say.
Oddly, even though the actual supply/demand dynamic has not shifted much (only expectations have), the world has now arguably hit its recovery stride. And the expected increase in demand from a return to more normal global growth should be a boon for crude oil. Also, there have not been major supply changes to counteract the bullish fundamentals.
Yet crude seems to be rolling over …
Just in the daily chart of crude oil above I see a triple top, lower lows and some considerable time below a now downwardly sloping 50-day moving average. (Again, this chart doesn’t show it because of a glitch on our data feed, but crude is testing resistance at the 50-day moving average. This may be a point when traders look to sell.)
Crude oil may be a tough short if you think the geopolitical turmoil has a long time before it settles down and might keep a floor under prices. But considering where crude sat before today, maybe these social riots are instead good selling opportunities.
The $90 level is important. A failure to decisively break and hold above there in the next couple days might mean there is a good chance we see $84 per barrel again real soon.
And … assuming we do see $84 soon, if money is not flowing into crude despite consistent geopolitical concerns, to where is it flowing? Some noticed that the euro or even the pound felt some safe-haven type buying last week, even though the US dollar is the typical safe-haven currency. Gold extended its recovery as would be expected from the notorious safe haven metal. We will have more analysis on this safe-haven stuff later this week. Also be on the lookout for more analysis on major commodities as we are introducing a brand new, commodities-focused newsletter next week. There will be plenty of details on this over the next few days.