Crude oil faces bearish pressure despite QE3 and Middle East tension

Chinese/Japanese tension rising

What Do You Get?

What do you get when you cross options expiration and Rosh Hashanah?  The answer is a $3 drop in the oil market in one minute. While oil’s big surprise move was made on light, holiday volume and during the last hour of options expiration, just looking at the charts, it is possible that the move could be a technical game changer. Is it possible that the fundamentals for oil might be turning bearish?

The Commodity Futures Trading Commission (CFTC) is demanding an investigation and wants to learn what happened and why. While the Federal Reserve’s promise of unlimited QE3D has put a floor under the oil market and there is the bullish support of rising tension in the Middle East and North Africa, there could be some developments that are actually bearish for oil.

Perhaps the most bearish story that is developing is the dispute between China and Japan over islands in the East China Sea. Pressures started to heat up when Tokyo Governor Shintaro Ishihara said he would use public funds to buy the islands which are called the Diaoyu Island in Chinese and Senkaku in Japanese, from a private Japanese owner. When the Japanese cabinet approved the purchase of the islands, China said it would not allow that to happen.

The concern for oil traders is the potential damage to Chinese-Japanese trade and its impact on oil demand. RT News reported that China and Japan generated trade worth $345 billion last year. China was the largest market for Japanese exports in 2011, while Japan was the fourth-largest market for Chinese export goods. China’s exports to Japan reached $148.3 billion last year while it imported $194.6 billion of Japanese goods, according to Chinese customs figures.The worry is that an escalation could weaken the demand for oil. It could lead to safe haven buying in the dollar and bonds and cause a flight away from the euro.

Speaking of the euro and saving the euro, that mantra might be put to the test as it is rumored that Spain is getting ready to ask for a bailout. Word that they are negotiating the terms could initially put downward pressure on the euro and also commodities across the board.Of course if a Spanish bailout goes well, that might create the blue print for other bailouts. If it works, it would be euro bullish and commodity bullish. Of course that would be after a fearful deflationary like sell-off.

Other than that, the other bullish forces lie underneath. QE 3 and tensions rising. In Libya the killing of an Islamic terrorist could lead to reprisals. The worries about Israel attacking Iran are still out there. And other anti-American protests in the Middle East and Africa.

 

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

Futures and options trading involves substantial risk of loss and may not be suitable for everyone. The information presented by The PRICE Futures Group is from sources believed to be reliable and all information reported is subject to change without notice.


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