Zak Mir on Crude and the oil majors

Although it feels like the situation in Iraq has gone on for years, apparently it was only eight years ending in 2011. To date, the inspiration for Iraq, Vietnam, beats this dead end situation by 11 years. However, as we are learning, this is a situation which is set to run and run. History tells us that nation building is a difficult art, as is attempting to deliver democracy before the locals (formerly known as “the resistance” now “insurgents”) are ready for it.

From a financial markets perspective all of this suggests just one thing to start off with – Crude Oil is rising. In fact, the commodity has been delivering technical and fundamental false dawns for many months now, with the dress rehearsal for a rally being the Ukraine situation. That has cooled off for now. But one would suspect that it will return in the autumn when Russia’s leverage over gas in Europe can kick in properly.

In the meantime it can be seen on the daily chart of front month WTI that we have been in a rising trend channel which has been in place since December. Arguably, one could have been long the commodity in the wake of the January bear trap from below November $91.77 support. 

However, early bird bulls would have been treated to a rather painful ride consisting of a gyration either side of the 200 day moving average, currently at $100.17. While the latest June spike through former March $105.22 resistance has effectively ended this gyration, it can be see that the charting picture remains complex. The ideal scenario is that there will now be no end of day close back below the former three month resistance and so WTI will head towards the top of the late 2013 price channel at $110 over the next 2-4 weeks.

BP (BP.)

What does all of this mean for leading UK oil plays? Probably, more of what we have already seen so far in 2014 – a break to the upside. Looking at BP (BP.) the message in the recent past has been that this is a stock which should be heading towards the top of a rising trend channel, which has been in place on the daily chart since July last year at 520p.

Incidentally, this should be enough on its own to take the UK index through 6,900 and all time highs. But in the meantime we are grappling with an extended bull flag above the 50 day moving average at 495p. The way that on the latest early June dip for the shares support came in above the 50 day line is a positive development. This implies that with the fundamental driver of the underlying commodity we should see 520p and perhaps much more over the early summer.

Royal Dutch Shell (RDSB)

Compared to BP it can be said that shares of Royal Dutch Shell (RDSB) have behaved in a much more rampant manner. This is especially the case since the golden cross buy signal between the 50 day and 200 day moving averages in January. Progress since then has been via a rising trend channel, with its floor running level with the 50 day moving average at 2,452p.

Ideally, one would now expect to see a fresh leg to the upside, with the 50 day line a logical end of day close stop loss. The favoured destination for Royal Dutch Shell shares over the next 2-4 weeks is seen as being as high as the January resistance line projection at 2,650p, especially since the stock seems to have shaken off the negative implications of an Island Top reversal pattern from May.

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