The oil price is horribly oversold; it is most oversold since the end of 2008. My guess is that someone, perhaps OPEC, will step in and do something to prop it up quite soon. As a firm believer in technical analysis, I am willing to stick my neck out with this prediction as the chart of Brent Crude has fulfilled its down-count on the point-and-figure chart. While point-and-figure charting is considered old-fashioned by some, in my long-time experience it is one of the most valuable charting techniques available. For clarity rather than Xs, I’ve used upward pointing red arrows for up-moves and instead of Os, downward pointing blue arrows for down-moves.
Using the AW Cohen three-point reversal method, the chart shows the fall through a triple bottom starting in April, continuing in May and the start of June. The break came as the price fell below $122, which signals an average fall of 23% - this level was passed on Wednesday. The AW Cohen method of point-and-figure charting is fully covered in my book, Even More Charting for Profit.
The rand has lost almost all it is likely to in the short term, and is, therefore, likely to strengthen slightly in the short term. This is indicated by a break through the signal line of its moving average convergence/divergence plotting. The exchange rate has already tested the $1/R8,5 support and fallen back. On fundamentals, given that while foreign investors remain risk-averse, even if our interest rates are cut, as they are likely to be, our rates are still higher than many other countries whose rates alarmingly lag their rates of inflation.
As the JSE- Overall index, the only major index to have recently recorded a new high, is out of step it may therefore mark time or ease a little in the short term. However, if astute longer-term foreign investors consider that our banks are sound and our economy doing better than some, they may be attracted by the dividend yields of our better-class shares. At home, a rate cut will enhance the appeal of shares directing more private investors towards the share market.
The drastic fall in the oil price, down 26% since April, made nonsense of my April 12 newsletter where I suggested that the petrol price agony would continue. Certainly at the pumps we must still pay the +-R5 that covers the eleven other items tagged on to the basic fuel price, but come early next month, we should be paying some R1,29 a litre less than we did in May. We could of course be saving even more had the rand not lost 8,6% against the U S dollar since May.
In theory the lower petrol price pulls down other prices, particularly those that use fuel in their production and are delivered by road. For the man-in-the-street, this mainly applies to food prices. However, although we are told that inflation had slowed, so far it’s is difficult to identify this using supermarket till slips.
Of course, out of everything good comes something bad. Then ‘bad’ is in fact what has brought the oil price down. The price of commodities, including those we produce here and hope to export are coming down because manufacturing production in many countries has slowed to the extent that commodities are no longer needed. South Africa’s platinum mining industry is an example where things have become really bad. The slowdown in the world’s car manufacturing industry, that used platinum group metals for auto-catalysts, has resulted in an oversupply of the metal. This has reduced its price by 23% since August. At the same time, costs including electricity and labour have risen making it no longer viable to produce platinum. Mines are, therefore, closing and throwing many people out of work. At the current rate of manufacturing inactivity, other resource producers may suffer a similar fate.