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A 75% Drop in Half a Year

Discussion in 'Beginners Bootcamp' started by dojit, Jan 25, 2009.

  1. dojit

    dojit Private

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    A 75% Drop in Half a Year
    Saturday, January 24, 2009
    By dodjit.com
    “Crude Oil has blasted through the 100 mark”
    “Crude will reach $200 by the end of the Year”
    “The commodity market is soaring”
    Only a couple of months ago newspapers were filled with such headlines as crude rallied to a high of $147, while Gold topped the 1000 mark. Since then, investors’ attention has jumped to the financial sector, as certain banks across the globe have defaulted, while others have been nationalized by authorities, in order to save the money structure. A combination of numerous factors, among them; market fear, decrease in consumer consumption, a rising Dollar and lack of credit, has slung global economies into mayhem sending commodity prices plummeting.
    Throughout 2003-2007, the United States was classed as the world’s largest economy, upholding a unique economic structure, driven by consumption; it was also classed as the world’s biggest oil consumer. Since the last global oil crisis in the 1980’s, the U.S has changed its policy and has been purchasing foreign supply, despite having their own reserves. Recent data showed that the U.S purchases over 50% of its consumption from foreign suppliers including its neighbor Canada and other Middle Eastern countries. One must not forget that Crude prices accelerated throughout those years due to demand from developing countries and not just U.S consumption. China’s demand for oil increased during that time by over 50%, and India’s demand followed not so far off behind.
    The current slowdown has had an effect on all the various sectors including commodities. From a high of $147, Crude oil has dropped by approximately 75%, touching unbelievable low levels. When looking back on the charts one can see that Crude prices dropped to below $40 per barrel, only a few weeks ago.
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    Even though prices have declined rapidly over the last couple of months, it doesn’t necessarily mean that demand has dramatically fallen as well. Crude oil’s Price can often be influenced by other factors, for instance, Dollar fluctuation or just refusal to pay high prices. According to the Energy Information Administration, China’s demand for Petrol has been increasing, filling in the lack of consumption from the U.S and Europe. When taking a glance at the charts below, one can see that while predictions are showing a decrease in U.S consumption, developing countries are predicted to increase their consumption at a steady rate. Analysts are even predicting that those countries will become the leading consumers in years to come.

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    *courtesy of Energy Information Administration
    Another aspect is energy efficient products. Over the years, awareness has increased and efforts have been made to introduce alternatives, for example hybrid vehicles. On one hand the increase in energy efficient vehicles could lower demand, yet on the other hand, those same products are still too expensive to be mass distributed, making them affordable only in certain countries, while not in others. Even though Energy organizations are predicting a fall in future demand in certain countries like the U.S, one has to remember that the decrease in demand from one country can be offset by the increase in demand by another.
    From a technical point of view, Crude oil presented a magnificent bullish candlestick on Friday, breaking out of range and increasing by 6.41%. Analyzing Crude’s chart more carefully one can see that an inverted head and shoulders pattern has formed and the price of this black gold is now trading around neckline resistance. In addition, the price found resistance after bouncing off the SMA Daily- an average which now converges with the head and shoulder’s neckline.
    While it is still too early to announce a change in trend, Crude’s price is now located at an interesting turning point, where a break could lead to higher ground, if consumption returns to its usual levels. Stock traders can easily trade Crude oil via various ETFs while currency traders can also profit from Crude’s indirect movement by knowing which pairs of currencies it affects. For further information, please review the article: “where are commodity currencies heading next” for a brief explanation of the connection between commodities and currencies. Monday’s session should be observed, as weakness across the board could send Crude back into range.
    [​IMG]
    *courtesy of stockcharts.com

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