Brent oil prices are still within the triangle formed by movements over the past 4 years. As the chart shows, they tried to break-out on the upside last month, based on Iran supply worries. But since then, they have retreated again.
Interestingly, there are now signs that fundamentals rather than sentiment are starting to drive oil markets. For the past 2 years, prices have been driven higher by the investment banks, with their continued forecasts of strong demand growth in China, plus reduced supply.
The only problem is that neither argument has proved correct. China’s demand growth is slowing fast, as it moves to a more domestically-driven economy. Whilst record oil price levels have encouraged new supply to come onstream.
Of course, rising prices helped originally to create the perception of strong demand, as buyers rushed to protect margins by buying forward. But today, this process is reversing as companies try to reduce inventory levels and working capital.
Usually, the end of a triangle formation leads to a major move upwards or downwards, as either the bears or the bulls give up their argument. Back in March, the blog suggested that:
If prices fail to break higher, then the next step might instead be (for companies) to use today’s higher prices as a platform for opening new hedges to guard against the downside risk.
With Saudi Oil Minister Naimi again warning that prices are ‘too high’, the blog sees no reason to change this analysis.