Inflamed Tensions Drive Crude Pricing

Daily Analysis - 26/05/2015

Flare Up in Violence Across the Gulf Continues to Propel Energy Price Momentum


Increased hostilities across the Arabian Peninsula continue to be the driving force behind elevated crude oil prices ahead of an upcoming meeting of OPEC members next month. With conflicts raging across the region in Iraq, Syria, Yemen, and even spilling over into Saudi Arabia, risks are acutely skewed to the upside.

Uptick in Violence Carries Crude Higher

The rapid advance of ISIS through the Middle East is spreading concern that regional oil installations are at risk from the radical group’s onslaught across the Gulf. After taking Ramadi, the group seems to have set its sights on Baghdad, threatening Iraq’s largest city while sowing insurrection in other regions like the recent bombing in the oil rich eastern province of Saudi Arabia. Concerns of a broader conflict emanating from Yemen are also driving risk premiums for Brent crude oil higher as the enormity of the country’s geographical positioning is not lost on markets. Should the Houthi’s manage to control the territorial waters, it could spell problems for one of the globe’s most important seaborne oil routes, driving prices for key benchmarks ever higher on the possible of expanded hostilities. Prices have retreated from yesterday’s brief rally as a rising dollar adds to momentum lower in crude oil.


Anti-Austerity Movement Spreads

Spain has been reeling from several years of stagnation and high unemployment owing to the austerity policies of the current ruling conservative Popular Party. The party itself is under fire from all directions from mishandling of the economy to the unfolding corruption scandal that has shaken the very foundations of support for the party. The recent change in sentiment of voters reflects the anger towards the austerity regime as voters elect for change from parties like Podemos and Barcelona En Comu. Greece was the first template for the anti-austerity movement which is rapidly spreading across Europe, especially in locales boasting high unemployment and lacking economic opportunities. European equities were punished yesterday, with all eyes trained on Greece and the negotiations with creditors. Leading the drop lower was the Spanish IBEX 35 which fell by -2.01% followed by the -0.50% loss in the French CAC 40.


Yen Hits New Multi-Year Lows

The rally in mainland Chinese shares continues to fuel momentum higher across Asia as stocks continue to be the best performing asset. The last 6-days have seen the Shanghai Composite rise by over 14% when including today’s results, highlighting the growing prowess of the Chinese equity markets while also emphasizing the potential downside risks. The stark divergence between equity markets and real economic data mirrors similar tendencies across the Pacific Ocean with American equities also likely overvalued, although not quite to the extent of China.   The IPO market specifically is something that should be monitored carefully considering the overheating nature of demand, with Shandong Shihua’s IPO yesterday seeing oversubscription to the tune of 826 times the amount of shares available in the offering. Meanwhile, optimism in the dollar has seen regional currencies continue to pullback just as the USDJPY pair breaks out to multi-year highs.


AUDUSD Equidistant Channel Technical Pattern

The resurgence in the dollar has seen the prevailing downtrend in the AUDUSD currency pair resume as the prospect of higher interest rates in the states offsets more dovish policies from the Reserve Bank of Australia with more rate cuts expected in the pipeline. The near-term equidistant channel pattern setting up in the AUDUSD pair has a bearish bias with expectations that today’s data will see the pair continue to trend lower unless US macro data misses estimates by a wide margin. The prevailing strategy for trading the channel focuses on initiation of short positions near the top of the channel targeting the lower channel line. Should the pair move above the upper channel line, this could signify an upside breakout, likely the result of poor data readings from the US.


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