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Oil at $75 a barrel?

August 13, 2008 11:57 IST

One of the joys of writing a regular column is you get an opportunity to write outrageous headlines, like the one above.  Of course, you can't simply be gratuitous - extravagant forecasts are only good if some of them (at least) come true or if they lead to some other interesting conclusions.

In other words, this is a serious question, and one that I posed to our in-house technical analyst a week or so ago.  I had been looking at a chart of oil prices and, while I'm no technical whiz (although I do have a passing sense of simple patterns like head-and-shoulders and the like), I noticed that if oil were to fall below $121.92 (the neck line of a S-H-S pattern) - as it has - it could (should?) fall all the way to $98. Of course, this, in itself, is no big shakes - an analysis we had done in April had forecast $100 (or a bit below) by year-end and a lot of forecasts today are calling for that level.

But, looking more closely at the chart, I saw another possibility. As this pattern played out, the price could well bounce off $110, rise a bit and then resume its decline.  This would set up - and trigger - another head and shoulders that would have a target at $75 to the barrel.

Now, that would be something, wouldn't it?

Everybody and his brother and sister are convinced that supply and demand, speculation, what have you, will all ensure that oil stays high. General Motors is preparing its last will and testament and even the US is beginning to talk about conservation. Surely, the die is cast?

Well, ... maybe.  Because, as we all know, the nature of markets is to build consensus till nearly everybody gets positioned one way and bam!  Swing the other way.

Of course, simply looking for something that would surprise the largest number of people and some idle Saturday afternoon chart gazing is hardly a sound foundation for making forecasts. But once the thought took hold, it began to gather its own momentum.  I realised that the only way something like this could happen would be if the BIG DADDY OF COMMODITY DEMAND were to suddenly slow down, or stop, or, indeed, go into reverse gear.

And, once I had that thought, some recent reports I read from Stratfor began to echo loudly in my mind. Stratfor produces high quality geopolitical intelligence reports, and for some time, has been writing that all doesn't seem well in China. To quote bits of a report from July 29,

"...China's behaviour has been erratic for several months now, if not for the past few years, with the implementation of new and often contradictory security and economic policies. These have all been brushed aside as somehow related to preparation for the Olympics. But they are in fact anomalous. China's behavior is not that of a country trying to show its best side for the international community, nor that of a nation simply concerned about potential terrorist or public relations threats to the Olympic games."

"...China's economic policies in the reform and opening era have been based on the idea of growth. This in many ways simply reflects the Asian economic model of maintaining cheap lending policies at home, subsidising exports, flowing money through the system and focusing on revenue rather than profits. In essence, it is growth for the sake of growth. This was the policy of Japan, South Korea, Indonesia, Malaysia and Thailand. And it led each of those countries to a final crisis point, striking Japan first in the early 1990s and the rest of the Asian tigers a few years later. But China managed to avoid each of the previous Asian crisis points, as it was on the lagging end of the growth and investment curves."

"...China's rapid and contradictory economic and security policies, rising social tensions, and seemingly counterproductive visa regulations appear to be signs of a government in crisis. They are the reactionary policies of a central leadership trying to preserve its authority, stabilise social stability and postpone an economic crisis."

"...[And]  if Chinese history since 1949 (and really quite a ways before) is any guide, the core of the CPC leadership is willing to sacrifice social and economic stability to preserve power. One need only look at the Great Leap Forward, the Cultural Revolution or the crackdown at Tiananmen Square for evidence of this.

"...Revolution is not, after all, a dinner party, and maintaining CPC control is paramount to the government."

Hmmm...if these guys know what they are talking about, and, frankly, of all the analyses I read, they are by far and away the most interesting (and convincing), perhaps China will be going through some sort of shake-out soon - possibly starting right after the Olympics.

Which, depending on its intensity, could trigger a major turnaround on many, many world markets - including, coming back to my not fully gratuitous headline, taking oil back down to $75 (or lower).  Funny, isn't it, that a slow down in China today would have a more profound impact on the world than a slow down in the US. Times they surely are a changing.

Anyway, I'm having cocktails at the Ritz in Shanghai next week - will sniff around and report back.

Jamal Mecklai
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