Well now it’s getting interesting. The Iranian oil minister has said Iran now, “backs any measures which help stabilise the market.” He was talking about the Saudi-Russian brokered deal to freeze global oil production at current levels. Doha now less of a dud!
I referred to the deal – which includes Venezuela and Qatar – as a “dud” because it didn’t stick. But even with Iran’s backing, it’s hard to see how the production freeze will make much difference in the long term. If global oil demand doesn’t pick up, you still have a massive supply glut.
But in the short term, in the world where traders live, the deal is generating some interesting price action. Brent crude futures were up 7.2% and hit an intraday high of $34.99. Charlie Morris – sitting across from me in the office for the week – said “it looks like we have a bit of a momentum crash in oil.” If he’s right, it would benefit the energy fund he recommended in the ‘Whisky’ portfolio to The Fleet Street Letter readers. Look at the chart below and tell me if he’s right.
The S&P energy sector fund charged out of the gate in mid-January. That move defied lower oil prices and therefore – to me anyway – looked bullish. But then through mid-February it lost some momentum. The last three days have seen it move up to within kissing distance of its 50-day moving average. If it could cross that and stay above it, you’d have something to watch.
Mind you, the demand story is still bleak. For example, Japan reported its largest decline in exports since 2009 in January. It was the fourth consecutive month of falling exports for the island nation. The gloomiest figure of all was that exports to China fell by 18% and Japan ran a trade deficit.
You can attribute some of that to the quiet ahead off the Lunar New Year (Year of the Monkey!). But there is also a simpler explanation. Trade is down because China has reached the limits of state-directed growth. Without institutional reform – or a big currency devaluation – China can’t be the engine of global GDP growth.
It’s weird to think that oil would rise in an environment where the world’s economy isn’t growing. But that’s what the “momentum crash” is. It’s when the rising trend in stock markets (momentum) stops working. The oversold losers outperform the winners, at least for a short period of time. If all of that (or any of that) interests you, you should probably be reading Charlie’s monthly reports.
Category: Market updates