Oil Forecast December 28, 2011, Technical Analysis

Light Sweet Crude

Fueled by comments coming out of Tehran that the Iranians would close down the Strait of Hormuz if the EU chose to put an embargo on Iranian oil imports, the oil markets reacted in a bullish manner as fears of a supply disruption came into being on Tuesday. The $100 mark was easily overcome again, and the top of the downward channel that we have been discussing has been pierced.

However, two things should be thought of during this move: The volume is almost non-existent this time of year, making the moves a bit exaggerated, and the close of the daily candle was below that top line for the channel. Considering this to be a breakout is probably being a little over anxious at this time.

Having said that, we are still tracking the potential downward channel and also the potential flag in this market that were brought up last week. A serious move to the upside would have us buying and holding onto a core position in this market, while a down move of any kind would have us selling the market for the very short-term.

Brent

Brent markets aren’t quite as clear about their intentions. The move on Tuesday only sent the market back into the epicenter of consolidation from the previous zone, and this isn’t enough to get us bullish of Brent at the moment. There could be a move upwards coming, but it will have much more to contend with than the CL contract will. With this in mind, we aren’t particularly interested in the Brent markets currently as the sheer amounts of noise will more than likely weight upon the market in either scenario.

The oil markets will be influenced by Dollar strength or weakness going forward, as well as this drama unfolding in the Middle East. However, if you look at demand for oil, it is actually fairly weak in a lot of the emerging markets. Also, one would have to think that the Iranians are willing to risk a real war with the United States and Saudi Arabia if they closed the sea lane down. The likelihood of that is quite slim at best. Because of this, we think ultimately this Iranian noise will turn out to be nothing.