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Russian Bear Delivers Crude Oil and Gold a Black Swan Event

Commodities / Crude Oil Aug 10, 2008 - 05:49 PM

By: Nadeem_Walayat

The inter-state conflict that sparked late last Friday when apparently a Georgian barrage of the break-away region of South Ossetia resulted in near immediate Russian invasion of heavy equipment which has been accompanied by Georgia wide air attacks . Whilst it is not entirely clear of the real truth behind the sequence of events, I am however puzzled as to how Russia could have mobilised such a large force virtually immediately that one would suspect under normal circumstances take literally as long as a week to assemble. Therefore I am leaning towards the Georgian account of events, as clearly the Georgians were tricked into a sequence of events so as the Russians could implement a plan of invasion and potential annexation of several regions of Georgia.

From what I have gleaned upto the writing of this article this conflict does not appear to be heading for an imminent resolution , and clearly signifies a wider objective at play at undermining the Georgian government that had been eager to pursue NATO membership. UN resolutions will prove meaningless as Russia as a permanent member will veto any resolution against it. Whilst US and British condemnation will prove irrelevant given the worlds opinion on the US and British invasion and occupation of Iraq therefore diplomatic pressure will prove infective and futile.

Clearly he only logical outcome is for the Georgians to comply with ALL of the Russian demands as the Russian military can continue escalating the war against Georgia with virtually complete disregard for military losses incurred as Russia moves from targeting the Georgian military infrastructure to targeting economic infrastructure such as the ports and the oil pipeline.

The existing analysis / forecast for crude oil as of 4th July, Crude Oil Seeking Black Swan for Spike above $150 in Overbought State , was for crude oil to make an imminent peak and trend lower towards a target of $110, reacting along the way at $135, and $120, which has thus far proved an accurate road-map as the below graph from the article illustrates. The forecast was conditional on that black swan events outside of technical analysis could change the trend at any point, however analysis concluded that the event which has generated the most chatter in the media of an imminent Israeli attack against Iranian nuclear infrastructure was of an extremely low probability of occurring. The weekend events would also have the effect of bolstering the Iranians as they could play off of the rift developing between Russia and the West to their advantage.

Charts Courtesy of stockcharts.com

However, now clearly the target of $110 has become subject to the weekend black swan event which has a strong potential to bring to an end the technical swing lower as of Fridays close. Therefore this analysis is now to determine how high could crude oil carry on the basis of the change in sentiment as market participants weigh the impact of the risk to the underground Baku-Tbilisi-Ceyhan oil pipeline which can supply upto 1.1 million barrels a day, thus more than enough to impact on oil prices if it is put out of action for a significant period of time, however being underground it would require a deep incursion by the Russians into Georgian territory more so than that undertaken to date and something to watch out for. Additionally a Russian blockade of Georgian ports prevents oil shipments from some alternative routes and therefore confirms an real impact on the supply of crude oil.

The oil price support targets on the way down will prove to be resistance points on the way up, the first resistance level that crude oil needs to overcome is $120, a break of which would propel crude oil higher towards $130. The resistance level of $135 is significantly higher than Friday's close and therefore it is expected to hold. However black swans by their nature are difficult to quantify in technical terms therefore on the chance that should $135 break then that would propel crude oil higher towards $150. On the other hand should crude oil failure to break above $120 would be a major sign of weakness and confirm the longer term target for crude oil of $80 - Crude Oil Parabolic Move Driven by Inflation Hedging that Could Unwind.

In summary, the black swan event implies a high probability of an early termination of the downswing and a corrective rally that is technically targeting a move towards $131.

Gold Current Technical Outlook

My last analysis of gold - Nothing Sweet About Gold, warned investors not to get caught up with gold bug fever by over committing to the precious metals sector and thereby both escalating the risk of losses and impairment in the decision making process, as experienced investors 'should' know that even investments that may seem near 100% certain to prove profitable can end up being big losers, therefore it is important to recognise this fact of a probability of being wrong and to ensure portfolios are not overly weighted in a particular asset or sector no matter how strongly one 'feels' fundamentals support that sector.

Personally where gold & silver is concerned I would limit exposure to 2% of the total portfolio value, to ensure ongoing analysis is unbiased, rather than devolve into a perpetual hunt for sign's in support of gains of a large holding.

Background - Gold has followed the energy sector lower, with crude oil peaking at just over $148, and subsequently declining below its second target of $120 on route to $110 primary target which now looks as though has terminated early due to non technical events, so therefore implies a rally from current levels.

Seasonal Influences - The seasonal tendency for gold is to make a low in July / August for a run up into December. Recent price action matches this seasonal tendency, as gold has declined in August towards its previous low of $846. Therefore seasonals are now bullish for gold.

Charting - Gold Made a lower high in July at $989 which is a sign of weakness as the subsequent decline has taken gold back down towards the $846 low. However there exists a high probability of a double bottom pattern (with a higher second bottom) as long as $846 holds, which given the Black Swan event could be the cue for a resumption of the bull market.

Elliott Wave Theory - EW analysis looks very bearish and implies that the current rally will be corrective enroute towards a further wave C decline to below the $846 low, i.e. probably a decline into the region of $800.

MACD - MACD is both bearish and oversold, therefore implying that the initial swing up will be corrective in nature requiring a further downswing in the MACD indicator.

Conclusion - On balance I am leaning towards a short-lived corrective rally towards $900, to be followed by a further swing lower that on break of $846 would target a move towards $800. The key here will be whether or not $846 holds!

Your analyst always on the alert for the market impact of black swan events.

By Nadeem Walayat
http://www.marketoracle.co.uk

Copyright © 2005-08 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading, analysing and forecasting the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 150 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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Comments

f myrat 10 Aug 08, 23:47	Georgian Black Swan I laugh at your comment about siding for Georgia. Georgia's minister of defence is a zionist and americans and isrealis have been teaching tactics to the Georgia. There was a deeper reason for this and it has been planned in advance by the Georgia et fils. Russia was not expecting this and this is why there were only 1000 paratroopers the first day. Georgia did not expect the backlash and now will pay. The stupid Georgian president is shitting his pants for listening to the zionists and soon he will be hanhing on a stake. Look for oil to go much higher as Ukraine, and others get involved.
Denny 11 Aug 08, 04:04	Caucus War Nadeem Walayat, The US/NATO has been having training excersises in Georgia a week preceding Georgia's assault on civilians in South Ossetia. Russia would have to be completely incompetent to not have noticed. See here: http://www.globalresearch.ca/index.php?context=va&aid=9788 and here: http://www.youtube.com/watch?v=cRl3qArJO-o While I'm a US citizen, I believe Russia has a right to protect it's people. Further complicating the US/NATO argument that South Ossetia is Georgian territory is the fact that US/NATO intervened in Yugoslavia so that a group of seperatists could have their own independent territory. Hmmm kind of hypocritical.
EVG 11 Aug 08, 16:58	Georgian terrorists It is a great disappointment to see US government to apply double standards and manipulate president of Georgia to make suicidal move, end his political carrier and potentially join Saddam in whatever hell hole he is in now. Never and I repeat never Russia will forgive Saakashville for acts of terror that ether he himself plan out or some of his trigger happy generals did. All the BS that CNN want the whole world to swallow is not going to work. People today have multiple sources of information; the reality is not what is being reported to American public. Russia did not invade Georgia, the head line need to be like this: “After 14 Russian peacekeepers killed buy surprised attack from Georgia controlled territory and 14 hours of none stop artillery and GRAD fire on civilian targets, Russia was forced to respond by sending overwhelming military force to defend small regain of South Ossetia and pushed the Georgian forces away from disputed territory” Dos any one knows what GRAD means, do you know what is used for, Google BM-21 GRAD. This 40 racket launcher is build to devastate and level enemy territory. This “boy toy” is not something you use to police rebellion republic, that is controlled by Russian peacekeepers’ for the last 16 yr. US need to stop on taking sides in other nations conflicts. What possible interest US can have with Georgia except buy jerking Russians on their border. I wonder if we, and yes I mean US citizens, how we will react if Russians start to mess around our border like Canada or Mexico. US government need to focus on our needs 1st, that is why they are in the office, we need to worry about our problems first. Bush call Putin “friend” and helps Georgia to increase there military budget 30 times. That is why our relationship with Russia means nothing, when today we say that the Russia/USA relationship may have long term consequences, what relationship?
J 11 Aug 08, 20:54	Georgia attacked first a) Georgia started the conflict in the short term and in the Olympics at that b) The civilian casualties are predominately South Ossetian So stuff all this ***** about "Russia attacking".
BTM 11 Aug 08, 23:21	US Military Superiority Afridi, what planet are you on? Please go back to KOS and let the big boys hold a conversation. We have already lost the war in Iraq and Afghanistan? Whatever, you are not bright and we are all dumber for having read that comment. Alright, moving on . . . It is hard to believe that the American left has so under-estimated our military potential. I believe it was this country who was attacked with no warning when the Japanese bombed Pearl Harbor. We were able to ratchet up our military machine and fight a world war in two different parts of the world within months. My grandmother was a Rosie Riveter, my grandfathers both fought in that war and I’ll be damned if I’m going to sit here and listen to arm-chair pundits downplay the ability of our military. Have no doubt, if the US is taken too lightly, we have the capability and capacity to destroy any army in the world. Certainly enough to defend Georgia, even from Ivan. However, if you are talking about political will, when jackasses like you are constantly undermining it, no, you are right, Georgia is in trouble. I’ll give the Commies this, their technology is years behind us, but since they have no free media, they have mastered the art of propaganda. It worked in Viet Nam quite well, they know the American left is weak willed and will not stand up and fight for Democracy, particularly when the left is half sympathetic to the Marxists anyway. P.S. That Splat the Candidate thing is darn annoying.
Don 12 Aug 08, 14:17	US Military Excercises There were serious US military provocations on Russia’s border last month, including two major military exercises. Operation Immediate Response began July 15. From the USA, 1,000 military servicemen took part in the three week exercise including the United States Army Europe, 3rd Battalion, 25th Marine Expeditionary Unit, 1st Battalion 121 Infantry Regiment Georgian National Guard (Atlanta, Georgia) and 5045th General Support Unit. The US Ambassador H.E. John Tefft outlined the importance of the training, saying: “It is in a spirit of Partnership for Peace, part of the NATO program. Brigadier General William B. Garrett commanded the exercise from American side: “We are conducting this exercise to enhance interoperability with a key coalition partner. Georgia has provided consistent support to ongoing operations in Iraq. Georgia is the third largest force contributor to Operation Iraqi Freedom and that means a lot to the United States.” The Russian Defense Ministry started a military exercise in the nearby North Caucasus region at the same time. Ministry spokesman Yuri Ivanov said the drill had “nothing to do” with the Georgian-U.S. maneuvers. Exercise Sea Breeze 2008 involved more than 2,000 service members from 16 countries and was held in the Black Sea and at land-based Ukrainian training facilities, according to EUCOM [US European Command]. “Everyone participating in this exercise should be very proud of the level of interoperability and cooperation that was achieved among the sea, air and land components as well as among nations,” US Navy Captain John Moore, the Sea Breeze deputy commander, said in a statement. Russia’s foreign ministry had said at the start of the exercise however that it saw it as a threat. “The nature of the exercises, the attempts to present them as anti-Russian and the participation of states from outside the region inevitably raise questions and some degree of concern,” it said.

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