The once famous Edwin Starr’s song War (What is it Good For?) has this line: War, huh, yeah. What is it good for? Absolutely nothing.
Well, moral issues aside, wars and conflicts are certainly good for something – higher commodities prices. It is not rocket science that in order to fight wars, you need well oiled war machines. Industrial metals and energy commodities come immediately to mind. This is the reason why crude oil prices have been rallying significantly for the past 1-2 weeks following the sounding of war drums in Syria.
However, it seems that the likelihood of war is starting to dissipating faster and faster. First we have Russia condemning any preemptive strike by the US (rather predictably), then we have UK, a long time war ally of US choosing to step away from joining a potential Syrian war. Finally we have Obama choosing to seek Congress’s vote on their opinion of the war, a surprising move considering that Obama could have utilized Presidential Action long to stop further alleged chemical attacks. Technically Obama does not have the unilateral power to declare war, but that didn’t stop George Bush from bluffing his way through Congress for the 1st Gulf war. By rolling over so easily, it seems as though Obama may not even want to truly attack Syria, as Congress is highly unlikely to approve the pressing of the red button. And in so doing, Obama can actually shirk from responsibility and then move on to other things.
With a lower likelihood of war, it is no surprise that WTI Crude decline so rapidly, with prices shedding almost $3.50 per barrel on Monday open. Technically speaking, price was already on a strong downtrend, forming a Channel on its way down. This morning’s sharp dip was no different, with prices quickly recovering, closing the first hour of trade above Channel Bottom and around the 106.0 support. Prices continues to climb higher and is hinting of a move back towards Channel Top, most likely the intersection between 107.5 support/resistance and Channel Top. Stochastic readings are currently pointing higher, but ultimately we are still within a bearish cycle, hence do not be surprise to see price unable to break beyond 107.0 and fall lower from there instead. In order for a stronger bullish conviction to form, Stoch readings should ideally climb higher than the closing levels of Friday which will put us in a better position for a test of 107.5.
Daily Chart shows price breaking within the 103-108.5 consolidation zone, which opens up 103.0 as plausible bearish target. Furthermore, last Friday’s candle is a Doji, which came after Thursday’s close under 108.5 level. Together with today’s bearish candle, it seems that the possibility of a climb back above 108.5 is more and more remote, affirming the likelihood of a 103.0 push.
Fundamentally, without any wars going on, it is unlikely that Crude Oil will be able to go back up to the 2013 highs especially since global economy growth rates do not justify oil at such high premiums. Furthermore, we can see from inventory levels that implied demand for crude oil is actually falling, not climbing. As such, we may have seen the highs of Oil in 2013 already, unless US Congress is eying for blood.
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