“Head and Shoulders” Over the Market

Oil prices are up significantly this morning on news that US-China trade talks have been “constructive, candid” according to a Chinese delegation. After trading flat yesterday, crude is up to $69.02 this morning, a gain of $1.19 (1.8%).

Fuel prices are also floating higher. Diesel prices are $2.2099, a gain of 3.5 cents (1.6%). Gasoline prices are $2.0774, a gain of 1.8 cents (0.9%).

Saudis Postpone Saudi Aramco IPO

This week, news came out that Saudi Arabia has put the initial public offering of its national oil company on the backburner. Saudi Aramco has been pushing towards an IPO on a US or European stock exchange for a while, but disclosure requirements have posed a major concern. The oil giant planned to sell 5% of its shares to raise $100 billion, which would go towards diversifying Saudi Arabia’s economy. Now, with prices higher, it appears their budget situation is less dire, making the deal less of a priority.

While the deal is off, the Saudi government is looking towards other ways to generate revenue without being so heavily reliant on oil. Given Saudi Arabia’s ability to move markets in a huge way, the cancellation of the IPO will have a big effect on markets:

1. Short Term – Saudi Arabia has been pushing for higher oil prices because Aramco’s value is directly related to oil prices. With the IPO canned, Saudi Arabia has less incentive to push for higher short-term prices, which could be bearish for markets.
2. Medium Term – The Saudi government’s budget will be more directly reliant on oil prices because they won’t receive the $100 billion they planned to use to diversify their economy. For this reason, they’ll be incentivized to keep prices higher.
3. Long Term – Prince Mohammed is pushing to transform the Saudi economy by 2030, and the country is committed to pursuing the IPO at some undetermined date in the future.

Head and Shoulders

Markets have been experiencing some significant up-down fluctuations over the past few months, which provides a bit of insight into how markets feel about the future. Commodity markets are influenced by supply and demand, but at their heart they are governed by traders. When a majority of traders expect prices to rise (ie, they’re bullish), they buy oil and drive up the price. When most traders expect prices to fall, they sell their positions and drive prices lower.

One technical trend popular in predicting a market reversal is the “Head-and-Shoulders” pattern, which involves prices reaching a high and falling, reaching a higher peak and falling, then reaching the original peak before falling again. The pattern shows that the bulls keep rallying to get prices higher, but can’t overpower the bears after three separate attempts. Markets are showing some early signs of a Head-and-Shoulder pattern, so traders are watching closely to see if sentiments are changing.

Looking at recent price activity, crude oil reached its first peak in May around $72/bbl before declining to $65/bbl. Then in June, prices rallied again, surpassing the previous high and hitting $74 before once again falling to around $65. Now oil prices are once again pushing their way higher, causing markets to closely watch whether the bulls can surpass the $72/bbl “shoulder” of upper resistance. If markets can sustain a rally above $72, it could mean the bulls are back in charge and higher prices are the trend. If not, markets could cool off until a major change (Iran sanctions, supply outage, etc) pushes enough bulls back into the market to stage another rally.