4 things you need to know about oil

What?

The holiday trading lull and lack of data supporting further global demand recovery resulted in oil prices staging a marginally corrective rally. At the start of the week, Brent was able to further recovery off 106 lows. But the two day risk rally ran into excessive demand located around the predominate downtrend channel at 110.66. Brent then spend the remainder of the week slightly below at 109.60 region. WTI traded in a slightly bullish, yet contained, 86.50 to 87.46 range.

Why?

The key factor in driving higher oil this week was really the lack of real drivers, according to Peter Rosenstreich, chief foreign exchange strategist at Swissquote Bank. “With the holiday season around the corner, news flow to financial markets all but dried up. On the macro front, Europe had some slightly positive news with Monti leaning towards a run for Italian prime minister and the ECB allowing Greek debt to be use as collateral, all which lowered tensions in Europe. On the US fiscal cliff issue while nothing has been finalized, the reports are that a deal is closer to completion. These factors allowed for a risk-environment.”

What’s next?

Rosenstreich believes the short term key for oil traders will be the result of the US fiscal cliff deal. Oil needs a real pick up in demand and while the US is slowly shifting their energy consumption habits, the nation remains one of the largest consumers. If the Republicans and Democrats don’t work out a compromise on the budget [which then will] push the U.S. back into recession and have sever repercussions to demand globally, a prospect that would likely mean less energy demand.”

What to do?

In the short term the direction of oil depends heavily on the results of the fiscal cliff negotiations as the econimic calender is light, according to Rosenstreich. “Our base scenario is that US politicians will opt for the kick-the-can down the road route by lifting the debt ceiling cap and delaying any serious decisions. This result should be mildly positive for oil and risky assets. However, the decision late Thursday to call off the vote increases the probabitly that the US ‘goes over the fiscal cliff’ and as a result, that will be significantly negative for oil and the sell-off would be heavy.”