Not since Moe, Larry and Curly Joe struck oil has the industry had such trouble balancing supply and demand. While there’s plenty of bickering about the fundamentals, I’ve found that CL’s price action is an excellent gauge of what to expect.
It’s been fairly easy to forecast. We called the March bottom very accurately [see: Mar 17 Update on Oil], and were only a few days early in August [see: Oil Bottoms Out.]
As we’ve discussed many times, the supply/demand picture is no longer the most important factor in CL’s pricing. It’s now a part of the central planners’ toolkit of essential levers.
They’ll force prices lower if Japan devalues the yen, thus facilitating the yen carry trade. Otherwise, CL always seems to find a reason to bounce. It’s very much a “carrot or stick” proposition.
From An Offer Japan Can’t Refuse back in September:
One of my more outrageous theories advanced back in March [see: Those Wacky Central Bankers] suggests that oil’s price crash over the past year was engineered in order to induce Japan to further weaken the yen.
The relationship is pretty easy to see, especially at important inflection points such as Aug 2014.
In case you hadn’t noticed, it’s happening again. USDJPY bounced 6.4% off Aug 24’s lows, and is back near its pre-correction highs. CL bounced too, but has given up most of those gains — plunging 21% since its Oct highs.
It’s where it plunged to that has me intrigued.
Remember the channel bottom that CL dipped below on Aug 24? Looked really touch and go? Like it might fall off the edge of the earth? It’s baaaack.
continued for members…
Channel bottoms don’t always mean a bounce. But, when something doesn’t bounce at a channel bottom, it usually plunges sharply. Failure at potential support makes folks nervous, and nervous folks sell.
In this case, there’s even another channel that should provide support. And, if that support doesn’t materialize, the .886 Fib should make for a good backstop.
Will we get a big bounce here? That depends mostly on whether or not USDJPY breaks out. Last week was a great start, spiking higher through the SMA100 on the latest ECB brilliance.
Given how far CL has fallen in the past week, central planners have probably already secured a pledge from the BoJ to break USDJPY out of its week-old slump. If so, stocks can get on with their rebound.
If CL drops below all this support, it has one last chance at 37.07. If it drops through 37.07, then it’s a long way down to 26.22. And, it would mean the BoJ has pledged to ramp USDJPY to a new level altogether — one geared to produce new highs in the near future.
Stay tuned.