Range high likely to be tough resistance for oil

on February 24 2010 11:07 AM

The move in Brent futures back towards the top of its range last week in part reflects geo-political tension surrounding Iran and some uncertainty about the strikes in France surrounding the closures of a Dunkerque refinery. The move higher also reflects that with the notable exception of the disappointing US consumer confidence data the majority of recent US data releases have been on the firm side. The shockingly poor confidence data drove home the point that while the US recovery may be here, it remains on wobbly ground. Weaker than expected German Feb IFO data and the dip in German Mar consumer confidence suggests that there is a risk that the recovery in the Eurozone could be stalling. The German economy failed to grow in the final quarter of last year. Germany is an export dependent country and its outlook is not helped by the fact that at current levels the EUR is still a strong currency; EUR/USD stands about 15% higher than its long-term average since EUR inception. UK data have also been poor; Jan retail sales and jobless data both provided negative shocks last week. It is clear that the economic recovery in the Western world is still in need of policy support to keep it from faltering. On this basis it currently appears optimistic to expect that demand from this region is likely to extend beyond current forecasts.

Political factors may continue to offer oil prices support going forward although the ending of the French strike should soften these concerns. That said given vulnerable, nascent, economic recoveries in the US and Europe and based upon a probable return of weather conditions towards seasonal averages it seems unlikely that oil will find the momentum to break through $80/$82 / barrel range high. Supply side data remain unfavourable. In the week to February 19 US crude oil inventories were again above the upper limit of the seasonal average. Given the lack of equilibrium in demand and supply, oil should remain more vulnerable to bad fundamental news than to good. We continue to view upticks in oil as selling opportunities and see scope for a move to back to $70 in a one month view ahead of a potential drop towards $60 / barrel.

Brent futures remain confined in range (chart: ForexCharts)

Jane Foley Research Director

More News from IBT MEDIA