Oil's Upward Trend Is Weakening

by: Carlos X. Alexandre

In face of a stronger dollar and lackluster economic projections, oil is adjusting to the "newfound" reality that future demand may not be indicative of current thinking. As a matter of fact, demand was never there – only hope.

Thursday's debacle in the oil markets is far more important than just a short-term move and I've been keeping an eye on the long-term picture, looking for a reversal of fortune. Technically speaking, the first step is here with a break of the $92 level and confirmation will unfold over the next two weeks or so!

Lately, we've had a number of forecasts from well known investment houses about commodities and currencies. But the one that truly caught my eye was Morgan Stanley's euro forecast. Not because it's in line with my humble thinking, but due to the huge reversal of position and the direct impact that it will have on oil. The Wall Street Journal reported that,

Morgan Stanley, one of the largest foreign-exchange banks on Wall Street, scaled back its year-end forecast for the euro to $1.36 from an earlier projection that it would reach $1.49.

I always take these forecasts with a grain of salt, but that's a 180 degree turn if I have ever seen one. And the reasons behind the forecast were not new: "economic growth and continued Greek debt woes." Bloomberg also had a report on Morgan Stanley regarding the dollar.

We're looking for the dollar to regain some stability over the second half of the year," said Ian Stannard, head of European foreign-exchange strategy at Morgan Stanley in London, in a telephone interview. "We'll see the global investment environment turn less favorable as liquidity conditions start to change at a macro level.

Then there's the "spread" question between West Texas Intermediate and Brent, and the logic behind it is virtually all over the place. The Economist attempted to explain the issue and started with a brief background in its article "Wide-spread confusion."

For years prices of WTI and Brent were locked together, though the higher-quality American WTI oil generally traded at a premium of a dollar or two to reflect its slightly lower viscosity and sulphur content, which ease refining into petrol, heating oil and other products. Patterns of supply and demand in America, the world's biggest consumer and importer of oil, rarely diverged much from the rest of the world, where Brent is the main indicator.

To highlight the reliability, or lack thereof, of our thinking caps on the subject, the article pointed out that,

Analysts at Goldman Sachs offer several theories, including a shortage of this grade of oil in Europe (it is of similar quality to absent Libyan supplies) and a general redirection of crude to booming Asia, without any corresponding rise in demand for LLS.

And those are only "theories." Finally, the article noted that even Louisiana crude is heading south, leaving Brent in a position by itself.

"The price of Louisiana light and sweet (LLS), an oil grade that feeds America's gulf refineries, has detached from Brent too, selling at around $4 a barrel less rather than its usual premium of a dollar or so."

Which one is the benchmark for global oil prices? WTI or Brent? Nobody really knows! And on Thursday, when the price for the commodity was already considerably reduced, the International Energy Agency said 60 million barrels of oil would be released from strategic stockpiles to help the global economy.

Government intervention in the markets, regardless of the asset, motive, or manner in which it is conducted, never works -- and actually oil prices found some support after the announcement. Japan knows the drill quite well when trying to lower the yen and whenever the country intervenes in foreign exchange markets, the quick "blip" always gives way to the resumption of the underlying trend.

Interventions that take advantage of market momentum appear more dramatic in the short-term and appear to knock a few "speculators" off the front lines. But unless the IEA plans on releasing oil reserves on a weekly basis, it hardly makes a dent from a macro perspective and always turns out to be an exercise in futility. Ultimately the markets will take care of business.

Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.