REPORT ON A STUDY ON CRUDE OIL PRICE CHANGES WHEN FUNDAMENTAL FACTORS OUT WEIGH TECHNICAL TOOLS

SUBMITTED BY: ABANIKANTA SAHOO (09BSHYD0011) NAME OF THE ORGANISATION: COSMO TRADEX PVT LTD.
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REPORT ON A STUDY ON CRUDE OIL PRICE CHANGES WHEN FUNDAMENTAL FACTORS OUT WEIGH TECHNICAL TOOLS BY
ABNAIKANTA SAHOO ENROLLMENT NO. 09BSHYD0011 BATCH- 2009-11

A report submitted in partial fulfillment of the requirements of MBA program of ICFAI Business School

SUBMITTED TO MR. PRATYUSH NANDA ADLKEHA COMPANY GUIDE GUIDE COSMO TRADEX PVT. LTD BUSINESS SCHOOL BHUBANESWAR BHUBANESWAR PROF.SANJAY FACULTY ICFAI

ACKNOWLEDGEMENTS
During the training session and the report preparation, I have been helped by many personalities, without the help of whom; the completion of this task would have been very tough. While submitting the work in printed form, I would take this opportunity to thank everyone, who has supported me during this project. Firstly, my sincere gratitude to MR. R.R. PATTNAIK, Branch Head, Cosmo Tradex Pvt. Ltd., Bhubaneswar, who had allowed me to undertake the project and my Company Guide Mr. PRATYUSH NANDA, Business Manager, Cosmo Tradex Pvt. Ltd., Bhubaneswar, who has helped and supported me at every point throughout the tenure of the project. He has played a versatile role, by being a friend to listen to my difficulties, being a teacher to correct me whenever I was getting off the track and more importantly a facilitator, who provided me with all the information and sources, which has an immense contribution in successful completion of this project. Secondly, I would like to thank Prof. SANJAY ADLAKHA, Faculty Guide ICFAI BUSINESS SCHOOL, Bhubaneswar, under whose able guidance I could produce a decent piece of work. One remarkable quality of Prof. Adlakha, which has helped me to do justice to the work assigned to me, is his quest for excellence. He guided me all the way from the beginning till the end by giving me his valuable inputs, whenever I required them. It was a pleasure to be working under Prof. Adlekha. Lastly, I would like to thank all the employees of Cosmo Tradex Pvt. Ltd., Bhubaneswar, especially Mr. DIVYA RANJAN NANDA and Mr. SUSHANT SETHI who have always
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encouraged me in going ahead with the mission at hand and have been supportive throughout the project

A K SAHO

EXECUTIVE SUMMARY
The aim of the project is two folds, firstly to study in details the fundamental factors affecting the price levels of CRUDE OIL and secondly, to determine the positions where the coming of fundamental news has changed the market trend drastically opposite to that predicted by the technical tools. This is the final report for the above stated project. This report is logically divided under four heads, i.e. introduction, main text, conclusion & recommendations and references. The introduction part would be giving a general overview of fundamental analysis and technical tools along with an overview about the company. Some of the very important concepts are discussed in this section. The purpose of the project, scope of the project, limitations of the study, methods of collecting data along with its source is given. An additional component of this section would be the study of different types of candlesticks. The second part, which is the main text, comprises discussion of various fundamental factors which play a crucial role in determining the future price of crude oil at exchanges. The term fundamental analysis is a complicated sounding name for a very basic approach to investing. Simply put, fundamental analysis is a means of analyzing commodities and trying to predict where the prices of commodities should be trading and what they will do in the future. The fundamental factors which are discussed in this section are Demand and Supply by OPEC countries, Geopolitical Issues, Dollar Index Movement and Relationship with gold. It is found that all of these factors play a great role in determining the future price charged to the
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investors and the role that each of these factors play can change overtime. Apart from this, the section covers the basic technical tools like Average Directional Index, Relative strength Index, Bollinger Bands and Directional Index which a trader can use to determine the crude oil prices. It is found that although in general the tools are well applicable in the market, but it is observed that at times following the signals of these tools prove costly to the investor. So, in order to find out the best possible way in which the trader can enter into the market the price chart of crude oil is studied in terms of candlesticks on which both the technical tools and fundamental news are superimposed. Conclusions regarding the best fitted tool or news are drawn along with the effectiveness of using them in this complex crude oil commodity market for determining the entry point for the investor. It is in this phase the candlestick study is used to accomplish our objective. As they are visually more attractive than standard bar and line charts and is used for clearer market reading. The different types of candlesticks are Marubozu, Engulfing, Hammer, Inverted Hammer, Hanging Man, Morning star and Evening star. In the third part of the report, some valued conclusions are drawn with respect to the best fitted fundamental news or technical tools for different period intervals. Apart from this, valuable recommendation is given for the investors trading in the crude oil commodity. The last part of this report is a list of references with the aid of which, we have successfully completed the project, which meets our stated objectives.

TABLE OF CONTENTS Page

ACKNOWLEDGEMENTS3 EXECUTIVE SUMMARY 4
1. INTRODUCTION.. 8

1.1 ABOUT THE COMPANY 1.2 PURPOSE

OF

THE

PROJECT.

11
1.3 SCOPE

OF

THE

PROJECT..

11
1.4 LIMITATIONS

OF

STUDY.

11
1.5 METHODOLOGY FOLLOWED.....12

1.6 BACKGROUND

INFORMATION..

13
1.6.1 FUNDAMENTAL

ANALYSIS

OVERVIEW..

13
1.6.2 TECHNICAL

ANALYSIS

OVERVIEW..

14
1.6.3 ABOUT

CRUDE

OIL.

15

2. MAIN

TEXT 18

2.1 FUNDAMENTAL FACTORS AFFECTING CRUDE OIL PRICES. 19 2.2 CONCLUDING REMARKS TO FUNDAMENTAL FACTORS..

32
2.3 ANALYSIS OF TECHNICAL TOOLS..

33 2.4 COMPARATIVE STUDY OF FUNDAMENTAL ANALYSIS AND TECHNICAL TOOLS. 43

3. OBSERVATIONS.

64

4. RECOMMENDATIONS..

65

5. CONCLUSION.

66

6. REFERENCES

67

LIST of Tables and Figures

Page
1. Table1: OPEC vs. World crude oil production (2001-2007).

19
2. Table 2: Major OPEC suppliers of crude oil (Oct08) .

20
3. Table 3: NYMEX crude oil price changes due to OPECs production change..

20
4. Table 4: Geopolitical issues (2008)

28
5. Table 5: Observation table..

64
6. Figure1: Historical price of crude oil

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7. Figure 2: Non-OPEC supply vs. Global crude oil demand-.

21
8. Fig 3: Changes in Global oil demand & oil prices

22
9. Fig 4: Dollar Index vs. Crude oil prices.

23
10. Fig 5: Dollar Inflation & Crude oil prices w.r.t Saudi Arabia

24
11. Fig 6: US crude oil demand vs. price fluctuation (2008)

26
12. Fig 7: Crude oil bear market (2008-09)..

27
13. Fig 8: Gold prices (2004-08)..

29
14. Fig 9: Correlation of gold and crude oil.

30
15. Fig 10: Bollinger Band..

41
16. Fig 11: Average Directional Index...

42
17. Fig 12: Directional Moving Index

42
18. Fig 13: Relative Stochastic Index.

43

19. Fig 14: Technical vs. Fundamental (Feb27th08).

44
20. Fig 15: Technical vs. Fundamental (March 4th08).

46
21. Fig 16: Technical vs. Fundamental (April 9th08)...

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22. Fig 17: Technical vs. Fundamental (June 17th08)..

50
23. Fig 18: Technical vs. Fundamental (June 27th08)..

52
24. Fig 19: Technical vs. Fundamental (July 14th08)...

54
25. Fig 20: Technical vs. Fundamental (Sep 2nd08)

56
26. Fig 21: Technical vs. Fundamental (Oct 8th08).

58
27. Fig 22: Technical vs. Fundamental (Nov 3rd08)........

60
28. Fig 23: Technical vs. Fundamental (March 18th09)..

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INTRODUCTION

1.1 ABOUT THE COMPANY

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COSMO TRADEX Cosmo Tradex, is the Introducing Broker of Kerford Fx in India. It was started in the year 2002 and is spread all over the states in India. Kerford Fx, is one of the leading investment and trading company that offers individual and institutional clients a comprehensive coverage of and direct access to the International financial market, while offering specialized trading and execution services in Foreign Exchange, Metals and Over-the-Counter markets. I t was started in the year 1960 and brought about a revolution by introducing Electronic Trading Platform. It is spread over 22 countries across the globe and has more than 500 agencies and 1000 franchises. Cosmo Tradex trades in three platforms i.e. Foreign Exchange, Bullions and Commodities. Foreign Exchange includes EURO, Great Britain Pound, U S Dollar, Swiss Franc, Japanese Yen, Canadian Dollar, Newzeland Dollar, and Australian Dollar. Bullions include Gold, Silver, Copper, Platinum and Palladium. Commodities are of two types i.e. Agro based which include soybean, soybean meal, soybean oil, cocoa, coffee, cotton, corns, wheat and the other one is Energy based which includes crude oil, heating oil and natural gas. Cosmo Tradex through Kerford Investment is giving the opportunity to the Indian people to trade in the following major exchanges of the world. Chicago Mercantile Exchange (CME) Chicago Board Of Trade (CBOT) London Metal Exchange (LME) Newyork Commodity Exchange (COMEX) Tokyo Commodity Exchange (TOCOM) Newyork Board Of Trade (NYBOT)

Explore the ways with Cosmo Tradex for a bigger fortune

Cosmo Tradex consistently provides liquidity to the client base via a real time internet

based trading platform.

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 Cosmo Tradex offers its revolutionary online trading platform to client to deal directly

from live streaming quotes.

Cosmo Tradex clients also enjoy 24 hours trading, competitive dealing spreads and

minimal transaction or commission fees.

Kerford Investment, parent organization of Cosmo Tradex has gained a strong

position in the online trading arena and has clients in more than 50 countries worldwide. In order to serve in a better way to its international client base, Kerford Investment is building and expanding regional Headquarters in the major financial centers of Europe, Asia, Africa and North America. The international profile and experience forms the basis of the companys activities that can be concisely described as follows Individual service Competitive pricing Efficient trade execution 24 hours a day

Whether you wish to trade foreign exchange, exchange for physical, metal or OTC market Cosmo Tradex market is the right choice for investors who appreciate the traditional values of dedicated services combined with cutting edge technology. So it is rightly said by Time is money and price is profit, never allow opportunities to slip away. HOW TO SET A PORTFOLIO? A Portfolio is essentially a sum of different investment in the commodity market. These investments include foreign exchange, bullion and commodities. The building of a winning portfolio is dependent on a number of factors but it is important to remember that a portfolio should be designed according to needs and goals of the investors. This is the basic reason for which the ideal portfolio of one investor is different from the other. In order to be a successful investor it is necessary to have good knowledge about the study of finances and options. BENEFITS TO INVESTORS: The commodity market provides free entry and exit to the investors which lure them to invest in this particular market. The trading platform provides greater price transparency and wider
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spread rates. The new risk management and hedging strategies are customized according to the investors need. RISK TO INVESTORS: An investment in financial instrument carry a degree of risk and Cosmo Tradex strongly believes that it is the professional and ethical duty to ensure that, the clients understand the nature and degree of risk into which they are entering when they make an investment.

1.2 PURPOSE OF THE PROJECT

The crux of our project titled A STUDY ON CRUDE OIL PRICE CHANGES WHEN FUNDAMENTAL FACTORS OUTWEIGH TECHNICAL TOOLS is to illustrate the price fluctuation of CRUDE OIL in the commodity market and how today's traders tend to get caught up with the large variety of technical tools at their disposal and they end up neglecting the most important and basic ones i.e. fundamental factors. The study of this project will show the determination of entry points when fundamental factors and technical tools give contradictory views of the market. The report will analyze the reasons for which WTI crude oil spot price had reached the record peak of US$148 a barrel in July 2008 and then, on December 23, 2008, it fell to US$30.28 a barrel, the lowest since the global financial crisis began. In 2009, it has been trading between US$35 a barrel and US$50 a barrel as per the study till March 30th.

1.3

SCOPE OF THE PROJECT

The scope of the project lies in the objectives behind the project which are as follows: 1. To study the fundamental factors affecting the future prices of crude oil.

2. To find out the positions where fundamental news has changed the trend of the crude oil market, i.e. the prediction of crude oil price by technical tools

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Apart from these above mentioned objectives, this study also aims at providing benefits to the organization i.e. Cosmo Tradex Pvt. Ltd. As Cosmo Tradex Pvt. Ltd, performs the task of maintaining investment portfolios for their clients and earning profits on their behalf. Thus better consulting to the investors can be offered by making them aware not to undermine the fundamental factors and the long term effects of these factors, to take a profitable position in the market and how these factors affect the price movements rather than relying wholly on the technical tools.

1.4LIMITATIONS

The project would be a study on crude oil as the commodity only and would not be applicable to the commodity market as a whole.
The technical tools are used on the past data records from January 2008 till march

2009. Only some of the most popular technical tools would be taken up. We are provided with a dummy trading account for the technical analysis.

1.5

METHODOLOGY

The methodology adopted for the project work has been: Identifying key fundamental factors that drive world crude prices. Collection of historical data to reinforce the impact of these fundamental factors. Further categorization of each of these fundamental factors into various sub factors. A comparative analysis of fundamental factors and technical tools for a number of dates for the year 2008-2009. The fundamental factors identified that drive the crude oil prices bullish or bearish have been categorized under the following broad categories:
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i. The theory of demand and supply ii. The movement of dollar index. iii. Geopolitical Issues. iv. Relationship with Gold. The Technical tools that have taken up are five different tools based upon the type of different types of assessment about the market movements that these tools make. These tools are: Candle Stick Patterns. Relative Stochastic Index. Bollinger Band. Average Directional Movement Index (ADX). Directional moving indices (+DI, -DI).

The selection of the above mentioned tools are based upon the logic keeping in mind the variety of studies that one investor can gauge using these tools. The candle studies e.g. can suggest a definite pattern that is prevalent in the market along with the periodic price movements. This study has been taken up as it is a very common tool used by a technical analyst. The Relative Stochastic Index has been taken up as it is a widely used tool to suggest the state the market is entering into namely an overbought position or an oversold position. The Bollinger Band was also taken up as it gave the band in which the market would operate. A very basic feature needed for any trader is to know the level of fluctuations or deviations that the market can experience and the Bollinger Band was an obvious choice. The use of ADX does not need to be mentioned as it is an indicator that suggests the momentum of the market. By this it means how confidently the market is moving up or down. Finally the Directional moving indices have been taken up. Although similar to ADX in terms of being momentum indicators, these tools are specific in determining the type of trend (uptrend or downtrend) and generating the buy or sell signals that the ADX fails to do.

1.6BACKGROUND INFORMATION 1.6.1 FUNDAMENTAL ANALYSIS

Fundamental analysis is a means of analyzing commodities and trying to predict where the prices of commodities should be trading and what they will do in the future. The main basis
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for fundamental analysis is supply and demand. As with most analysis, the goal is to derive a forecast and profit from future price movements. To forecast future commodity prices, fundamental analysis combines economic, industry and company analysis to derive a commoditys current fair value and forecast future value. Fundamentalists do not heed the advice of the random walkers and believe that markets are weak-form efficient. By believing that prices do not accurately reflect all available information, fundamental analysts look to capitalize on perceived price discrepancies. The different events which affect the price of crude oil are: Downturn in the World Economy: The year 2008 was characterized by a steady increase in world crude oil prices peaking in July followed by the lowest prices since 2004. The downturn in the world economy is likely the most important factor affecting the price of crude oil in 2008. With the major world economies facing significant credit challenges, economic activity has decreased substantially. This has affected demand for crude oil-derived products and the perception that demand will decrease even further in the future. Oil Commodity Trading Activities: As in 2007, there was significant paper trading of crude oil on world markets in 2008. While the effects of increased trading activity are hard to quantify, it appears that speculative trading increased the level of volatility in crude oil prices substantially. The rise to close to $US150 and subsequent fall to $US40 cannot be easily explained by traditional market fundamentals. The U.S. Dollar: While at the beginning of the year, Canadian consumers were somewhat shielded from the high crude oil prices due to an appreciating Canadian dollar relative to the U.S. currency, U.S. refiners were faced with extremely high prices that were passed on to consumers in the form of higher pump prices. As the year progressed and the price of crude oil dropped, so too did the Canadian dollar. This meant that Canadian consumers did not see the same percentage declines in pump prices. Geopolitical Activities: While contributing to higher prices in the early part of 2008, heading into the summer, the continued conflict between Russia and Georgia, militant attacks in Nigeria and escalated concerns about Iran's nuclear program had very little affect as prices declined in the latter half of the year.

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OPEC: The cartel continues to be a major player in world oil markets. In an effort to restore some of the $US100 drop in prices, on December 17, 2008, OPEC announced its largest cut in quotas ever2.2 million barrels per day effective January 1, 2009. Weather Related Activities: Although there was very little weather related impact on price, Hurricanes Ike and Gustav in September 2008 caused significant disruptions to the U.S. oil supply. The relatively small price impact can be attributed to the decrease in North American demand that was taking place due to the economic slowdown. U.S. Inventories: After being well below the bottom of the 5-year range during the spring of 2008, as the year came to a close, U.S. inventories increased to levels at the high end of the five-year average. This increase sent a signal to traders that the market was oversupplied and caused a decrease in the price of crude.

1.6.2

TECHNICAL ANALYSIS

Technical analysis is the forecasting of market prices by means of analysis of data generated by the process of trading. It is the process of analyzing a commoditys historical prices in an effort to determine probable future prices. Technical Analysis is the science of recording, usually in graphic form, the actual history of trading (price changes, volume of transactions, etc.) in a certain stock or in the Averages and then deducing from that pictured history the probable future trend. This is done by comparing current price action (i.e., current expectations) with comparable historical price action to predict a reasonable outcome.

Some important concepts used in technical analysis:

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PRICE FIELDS: Technical analysis is based almost entirely on the analysis of price and volume. The fields which define a commoditys price and volume are explained below. OPEN: This is the price of the first trade for the period (e.g., the first trade of the day). HIGH: This is the highest price that the commodity traded during the period. It is the point at which there were more buyers than sellers (i.e., there are always buyers willing to buy at lower prices, but the Low represents the lowest price sellers were willing to accept). LOW: This is the lowest price that the commodity traded during the period. It is the point at which there were more sellers than buyers (i.e., there are always sellers willing to sell at higher prices, but the High represents the highest price buyers were willing to pay). CLOSE: This is the last price that the commodity traded during the period. Due to its availability, the Close is the most often used price for analysis. CHARTS: The foundation of technical analysis is the chart. In this case, a picture truly is worth a thousand words. Line, bar, volume bar, candle sticks are some of the charts commonly used for technical analysis. The price fluctuation of crude oil in the commodity market can be determined with the help of technical analysis, which is proved to be extremely useful and should be used mostly for short term trading. Beyond the short term, technical analysis loses its accuracy and is less useful for the longer term time frames.

1.6.3

ABOUT CRUDE OIL

Crude Oil is one of the most actively traded commodities in the world. The trading symbol of crude oil is CL in futures and LO in options. The price of crude oil is determined in the future markets on two international oil commodity exchanges NYMEX in Newyork and ICE in London. The delivery period of Crude Oil is one month and must be initiated on or after the first calendar day and completed by the last calendar day of the delivery month. The Crude Oil Futures are quoted in dollars and cents per barrel and are traded in units of 1,000 U.S. barrels (42,000 gallons). The year 2008 is considered to be the extraordinary year in World Crude Oil markets as certain Geopolitical events, significant trading on futures markets and the start of a worldwide recession led to record highs and subsequent record declines in world oil prices.
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The report will analyze the reasons for which WTI crude oil spot price had reached the record peak of US$148 a barrel in July 2008 and then, on December 23, 2008, it fell to US$30.28 a barrel, the lowest since the global financial crisis began. In 2009, it has been trading between US$35 a barrel and US$50 a barrel.

Figure1: Historical price of crude oil Crude oil prices behave much as any other commodity with wide price swings in times of shortage or oversupply. The crude oil price cycle may extend over several years responding to changes in demand as well as OPEC and non-OPEC supply.

WHO SETS CRUDE OIL PRICES? One of the most common misconceptions about OPEC is that the Organization is responsible for setting crude oil prices. Although OPEC did in fact set crude oil prices from the early 1970s to the mid-1980s, this is no longer the case. It is true that OPEC's Member Countries do voluntary restrain their crude oil production in order to stabilize the oil market and avoid harmful and unnecessary price fluctuations, but this is not the same thing as setting prices.

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In today's complex global markets, the price of crude oil is set by movements on the three major international petroleum exchanges, all of which have their own Web sites featuring information about oil prices. They are the New York Mercantile Exchange (NYMEX), the International Petroleum Exchange in London (IPE) and the Singapore International Monetary Exchange (SIMEX). The Web sites of the Paris-based International Energy Agency (IEA) and the US Energy Information Administration (EIA) also have extensive historical information on oil prices.

PRICE FLUCTUATION OF CRUDE OIL Recent crude oil price increases are an extension of oil market developments originating in the 1990s. At that time, relatively high inventories and ample surplus production capacity served to limit oil price fluctuations. When spot market prices moved up or down, futures contracts requiring delivery in distant months generally traded close to $20 per barrel, consistent with a market expectation that producers would ensure that spot prices would eventually return to that level. However, as leading OPEC members shifted toward a tight inventory policy and global oil demand recovered from the slowing effect of Asias financial crisis, the global market balance tightened and inventories declined sharply at the beginning of the present decade. Oil prices rose to $30 per barrel in what might be seen as the first leg of the upward trend. By 2003, inventories were drawn down sufficiently such that subsequent increases in global demand stretched oil production to levels near capacity. The large, unexpected jump in world oil consumption growth in 2004, fostered by strong growth in economic activity in Asia, reduced excess production capacity significantly. In mid-2008, despite high prices, world oil consumption growth remains strong, overall non-OPEC production growth continues to slow, and OPEC oil production has not grown sufficiently to fill the gap. In addition, geopolitical risks create considerable uncertainty about future supplies.

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MAIN TEXT

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2.1FUNDAMENTAL FACTORS AFFECTING THE CRUDE OIL PRICES: Demand and Supply: The forces of supply and demand are indispensable i.e. to say that
they play a universal role in determining the price of any commodity. As the axiom goes, I will pay you the right amount but you should have the right amount to deliver and I should demand the right amount. Crude Oil is no exception. For the global oil industry, oil trade represents the close connection between two main centers of activity: upstream exploration and production, as well as downstream refining and marketing. The interactions between the upstream and the downstream largely determine crude oil supply-and-demand balancing dynamics. The supply side of the equation can be attributed to a number of factors: a. OPEC is the Organization of Petroleum Exporting Countries. It is an inter-governmental organization that is aimed to co-ordinate and unifies petroleum policies amongst the member countries to secure fair and stable prices, regular supply to consuming nations and also good returns to investors who prefer to invest in oil as a commodity. It has 13 countries as members. These member countries jointly produce 45% of the worlds crude oil and 18% of natural gas. OPEC exports constitute 54% of the crude oil traded internationally. The member countries are Iran, Kuwait, Saudi Arabia, Venezuela, Qatar, Iraq, Indonesia, Libya, UAE, Algeria, Nigeria, Ecuador and Angola. More recently, Indonesia has moved out of OPEC. As per October2008, the major oil producers of OPEC are Saudi Arabia, Iran, Kuwait, UAE, Venezuela and Iraq. The table below illustrates the total share of OPEC out of the total world crude oil production. Production levels are in terms of 000 bpd.
2000 7,213. 1 9,316. 5 7,630. 6 6,287. 5 21,410. 2001 7178.8 9327.4 8249.6 6033.6 20776.6 2002 7191.3 9474.5 9040.0 5951.6 18618.3 2003 7140.1 9549.4 9960.9 5628.2 20408.5 2004 6823.9 9961.8 10745.7 5374.9 21981.5 2005 6538.3 10130.3 11083.2 4905.1 22722.0 2006 6447.8 10077.8 11532.4 4501.5 22887.0 2007 6499.1 9796.1 11996.7 4320.4 22495.2

NORTH AMERICA LATIN AMERICA EASTERN EUROPE WESTERN EUROPE MIDDLE EAST

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AFRICA ASIA and PACIFIC Total World OPEC OPEC percentage

4 6,745. 6 7,253. 2 65,856. 9 28,873. 3 43.8

6613.3 7207.6 65,386. 9 28,008. 3 42.8

6429.2 7275.9 63980.8 25595.3 40.0

7246.4 7287.7 67221.1 28187.9 41.9

8276.9 7347.1 70511.7 31076.8 44.1

8815.7 7445.9 71640.5 32305.7 45.1

8958.4 7310.7 71715.5 32448.6 45.2

9065.7 7309.2 71482.3 32077.1 44.9

Table1: OPEC vs. World crude oil production (2001-2007) Clearly when it comes to the production level, OPEC still is the big brother. Now considering the member countries of OPEC, The table below shows the list of countries and the production level of these countries in terms of million barrels per day. These countries together constitute about 70% of the total oil production by OPEC.

Members October08 supply (mbpd) Saudi Arabia 9.35 Iran 3.91 Kuwait 2.63 UAE 2.55 Venezuela 2.35 Iraq 2.29 Table 2: Major OPEC suppliers of crude oil (Oct08) Since price changes are a result in the change of demand-supply dynamics, OPEC countries meet regularly to set production quotas to stabilize the oil market. They do so by changing the production quotas (decreasing/increasing) in balance to demand and price levels. The table below illustrates the major change in production level till date by OPEC and the corresponding price movements observed in NYMEX.

Month

Venue

Change (mbpd)

November06 February07

Doha Abuja

-1.2 -0.5
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Final volume as (%)Change in per actual NYMEX crude working capacity oil prices (mbpd) 26.3 0.82 25.8 6.84

November07 September08 October08

Vienna Vienna Vienna

0.5 -0.52 -1.5

27.25 28.8 27.3

10.45 -27.21 -18.45

Table 3: NYMEX crude oil price changes due to OPECs production change

a. Increase in NON-OPEC supply: Apart from OPEC supply, the supply side of the equation is being reinforced by the non- OPEC countries. Major developments coming on stream 2007-2010 in the Caspian sea, West Africa, Brazil and Canada. The pace of non-OPEC countries is steadily increasing.

Non-OPEC supply vs. Global demand.

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Figure 2: Non-OPEC supply vs. Global crude oil demand

World Demand for crude oil: The scenario for the global oil demand and supply has been changing over the years and has become more dynamic than ever. The graph below illustrates the global oil demand and the oil prices from 1990-2007.

Changes in global oil Demand & oil prices

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Source: Oil market report by IEA (global oil demand) Fig 3: Changes in Global oil demand & oil prices

1. Movement of Dollar Index: The value of dollar is another important factor

that decides the price of crude oil. Crude oil is priced in US dollars and the revenues that are generated by the oil producing companies are in terms of US dollars. Oil prices are high only in US dollars but in terms of other currencies, the prices are low such as the Euro and the Yen. Thus the results of dollar devaluation are: i. ii. It reduces oil supply and increases oil demand. It reduces drilling activities in the oil producing countries. It also reduces their purchasing power and causes inflation. Drilling activities are highly correlated with oil prices. The trend in total rig count can be looked upon from U.S. rig count data which represents almost half of the worlds total. Dollar devaluation reduces drilling activities in the North Sea. Drilling activities in Europe are negatively correlated with oil prices in US Dollars. The table below establishes the strong negative correlation between data for US dollar index and the NYMEX crude oil prices. The data collected from Jan07 to March09 shows a strong negative correlation of -0.80.
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iii.

Fig 4: Dollar Index vs. Crude oil prices. iv. Dollar devaluation causes inflation and reduces the purchasing power. Thus it has a strong negative effect on the oil producing countries. As an example, the case of Saudi Arabia can be taken into consideration. The graph below explains clearly how dollar devaluation can have severe consequences on the inflation scenario and that producing oil becomes very costly for that nation.

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DOLLAR INFLATION AND CRUDE OIL PRICES (SAUDI ARABIA)

Fig 5: Dollar Inflation & Crude oil prices w.r.t Saudi Arabia

The graph shows that as the dollar index moves up, the inflationary situation dips down and vice-versa. Dollar devaluation affects OPEC members differently. OPEC states have different trading partners. Countries that import more from the US stand to lose less than countries that receive most of their imports from Europe and Japan. The geographic location of some OPEC members plays an important role in determining their purchasing power. Venezuela stands to lose the least from dollar devaluation. A large percentage of its imports come from the US. By contrast, Indonesia is far away from the US and close to Japan. A large percentage of Indonesias imports come from Japan. Dollar depreciation hurts Indonesia more than Venezuela. However, this inverse relationship between the dollar and the crude oil price stands nullified for three reasons: a. When the local currency is not pegged to the dollar. b. When the country has a diversified economy
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c. When the dependency on oil is small.

Various factors affecting movement of Dollar Index: The below mentioned

factors affect the value of USD. In each case when actual value comes out to be more than that of the forecast value, the dollar appreciates. These are:
i.

Residential Building Permits: It measures annualized number of new residential building permits issued during the previous month. It is cared by traders because it's an excellent gauge of future construction activity because obtaining a permit is among the first steps in constructing a new building. services sold by producers. It is cared by traders because it's a leading indicator of consumer inflation - when producers charge more for goods and services the higher costs are usually.

ii. Producers Price Index (PPI): It measures change in the price of finished goods and

iii. Core PPI: It measures change in the price of finished goods and services sold by

producers, excluding food and energy.

iv. Housing starts: It measures annualized number of new residential buildings that began

construction during the previous month. It is cared by traders because it's a leading indicator of economic health because building construction produces a widereaching ripple effect. For example, jobs are created for the construction workers, subcontractors and inspectors are hired, and various construction services are purchased by the builder.
v. Federal Governor Speeches about interest cuts: It measures change in the total

inflation-adjusted value of output produced by manufacturers, mines, and utilities. Traders care a lot about this because it's a leading indicator of economic health production reacts quickly to ups and downs in the business cycle, and is correlated with consumer conditions such as employment levels and earnings.
vi. Pending Re sales: It measures change in the number of homes under contract to be

sold but still awaiting the closing transaction, excluding new construction. It is cared by traders because it's a leading indicator of economic health because the sale of a home triggers a wide-reaching ripple effect. For example, renovations are
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done by the new owners, a mortgage is sold by the financing bank, and brokers are paid to execute the transaction.

2. GEOPOLITICAL ISSUES:

a. ECONOMIC CONDITION The economic upturn or downturn does have a significant impact on oil prices. For e.g. post the Asian Market crisis of 1997, world growth declined by almost 1.49% to 2.53% in 1998 and oil prices followed suit, as prices were down by more than 30% year-onyear.

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Fig 6: US crude oil demand vs. price fluctuation (2008) In 2008, the world oil production is 73.79m barrels/day, whereas U.S consumption alone is 19.4m barrels/day which is 26% of total oil produced in the world. Hence U.S. is one of the major importers of crude oil. So, the current U.S. and global economic downturn has led to a decrease in global energy demand and a rapid and substantial reduction in crude oil and other energy prices. According to the American Petroleum Institute, demand for oil in the U.S. in 2008 has gone down by 6% to 19.4m barrels/day. But oil consumption did not even decrease 10%, so what is the real cause of this price collapse in only 5 months from plummet $150 to under $40 in the second part of the year? The answer is Hedge funds. During the first part of 2008, Western economies were already slowing down noticeably and hedge funds gradually pulled trillions of dollars out of the market and parked them in energy exchange traded funds (ETFs). At that time China and India's growing demand for oil and the "decoupling" of east/west economies led many believe that commodities were a "sure thing", a sound enough tangible insurance to protect overinflated assets scavenged from made-up bubbles. So using it as leverage, profits were multiplied as oil prices went up and it was not a bad deal during the recession.

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Fig 7: Crude oil bear market (2008-09) But when the banking industry collapsed, hedge funds had to raise cash by "deleveraging", i.e. liquidating their leveraged energy ETF positions due to which the price of oil tumbled. Due to anecdotal evidence, the short term banking of ETFs was suspended by the US Securities Commission during that time but not short selling of energy prices, and the leverage mania soon found an escape route in ultra short oil ETFs, which compounded the speed of the downward spiral of crude oil price fall. By December 2008 the oil price had collapsed 75% and as we entered 2009 the oil landscape has reversed dramatically from a year ago. The price of oil is lower than production costs and new exploration projects are being cancelled. China and other emerging markets are eyeing the fall in crude oil price to utilize huge trade surplus foreign currency reserves to buy up crude oil reserves and to pump into its strategic reserves. This will give them a better position when the global economies revive and OPEC countries decide to raise the oil prices. Hence from the above analysis we can expect that with the recovery of the U.S economy along with the global economy as a whole there will be a strong bounce back in the price of oil.

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b. WORLD EVENTS: The geopolitical news has resulted in increased volatility in

the oil prices. With war between Israel and Hamas still going on, chances for a truce between two parties have declined. Talks between the Russia and Ukraine on the price of gas deliveries to Ukraine for 2009 and transit fees for Russian gas to Europe through the country broke down on Dec. 31. Due to this, the news from Gaza and Ukraine is raising concern over possible energy supply disruption, supporting oil prices in the short term.

Date
25/02/2008

World Events
Turkish military operations inside northern Iraq and on new warnings from Iran over its nuclear ambition Threats in Nigeria, as a rebel group said it would carry out new attacks on oil facilities Tension in Africa and Middle East, as militant group threatened attack on Nigeria delta Israeli Prime Minister Ehud Olmert resignation feared a possible attack on Iranian by its successor Events adding tensions in the region over the conflict between Georgia and Russia. Fear of Tropical Storm Gustav to hit as hurricane in the oil facilities of Gulf of Mexico. Table 4: Geopolitical issues (2008)

Market Fluctuation
WTI increased by $99.35 Brent crude gained $97.53 WTI increased by $130.98 Brent crude gained $129.89 WTI increased by $141.65 Brent crude gained $141.37 WTI increased by $127.20 Brent crude gained $127.41 WTI increased by $121.23 Brent crude gained $120.33 WTI increased by $118.15 Brent crude gained $116.12 $0.54 to $0.52 to $2.13 to $1.58 to $5.60 to $4.79 to $5.01 to $4.70 to $5.67 to $5.97 to $1.88 to $1.58 to

28/05/2008

10/07/2008

30/07/2008

21/08/2008

27/08/2008

The above Geopolitical Issues, such as war, natural calamities and political issues have witnessed a surge in the oil prices.

RELATIONSHIP WITH GOLD: The Relationship between Gold and Oil is that,
historically Oil and Gold have a positive correlation. The reason being that oil purchases were made in gold. Even today, a big chunk of the oil revenue ends up being invested in gold. The
34

correlation between gold and crude oil has been found out to be +.90, which is indeed a very strong correlation. If we look at the high rise in the price of oil which was $25 per barrel way back in 2000 to around $147 in 2008, we will also have to look at the rise in the gold prices too. The table below shows the increase in gold prices from 2000-2008

Fig 8: Gold prices (2004-08) The basic reasons for gold preference by investors are: Gold is both monetary asset and commodity: Apart from investment reasons, currencies always used to be simple gold derivatives. The entire money creation by the central banks was covered by physical gold reserves. Therefore gold is both monetary asset and commodity.

Gold is used as a protection against inflation: Gold and the development of inflation have a highly positive correlation. Therefore the investment in gold represents an excellent way of protecting one's purchase power. The dollar has lost 95% of its value since the establishment of the Federal Reserve in 1913 (source: Fed inflation calculator), whereas gold has increased from USD 20.67 to above 1,000 by a factor of 50. Gold is used as a hedge against the USD.

35

The table below shows the correlation between gold prices and crude oil prices.

Source: sunshineprofits.com Fig 9: Correlation of gold and crude oil If we look at gold as a commodity, it is a means to hedge against inflation. Thus this enhances the demand for gold and hence its prices. This increase in gold prices can be attributed to a number of factors: i. The first way to look at it is by mentioning the negative correlation between dollar and gold prices. This negative correlation can be justified on the basis of the fact that investors prefer gold as a move against a weakening dollar. The dollar weakened due to a number of reasons. They are: a. The increase in the military expenses by the U.S has been unbelievable. From what was $300 billion (in current dollars) in 2001 has sky rocketed to a figure of $700 billion (in current dollars). This increase in the government spending along with the increase in debt ($9.56 trillion in 2008 as against $5.5 trillion in 2000) and weakening of the U.S dollar led to higher gold prices.
36

b. The slowdown of the U.S economy is yet another factor that has attributed to the high gold prices. The high inflationary levels have resulted in lower bond yields and depreciation of dollars. Thus this has resulted in high gold prices. c. Further the housing bubble further added to the depreciation of the USD and thus higher gold prices. d. The other prominent reason is the appreciation in Euro value. The Euro has been appreciating with respect to the USD (1 Euro = $1.45 in 2008 as against $0.82 in 2000) and hence gold prices have surged. ii. The next way to look at it is by increase in gold consumption levels. a. Higher gold consumption by China (a surge of 20%) has led to higher gold prices. b. Further the largest gold market, India increased its imports. The figures almost crossed above 8000 tones. c. As per the report of the World Gold Council, 45 countries in all have increased their gold reserves since 2000. As an example, the gold reserves of Greece have increased by 83.1% during the period 2000 to 2008.

ROLE OF SPECULATION ON CRUDE OIL PRICES

The higher oil prices in July 2008 was the impact of massive speculative investment money flow into oil futures. The speculative investments from financial firms contributed to the price run-up in early 2008, and that a selloff, accelerating as financial market woes set in by late summer, contributed to the subsequent price decline. Increasingly speculative behavior of a more diverse set of investors, including hedge funds, pension funds, and investment banks, has made oil-market trends harder to predict. The larger so-called 'speculative' investors loom in commodity markets, other than supply/demand fundamentals one may have to look for daily price drivers. The rise of investment from speculators, including hedge funds, has added liquidity to the market but it also has skewed the impact of fundamental news and heightened volatility Futures markets are markets in which people trade the right to specified quantities of a specified commodity to be delivered at some point in the future. For example, one might be able to buy or sell a contract whereby the seller agrees to deliver a barrel of crude petroleum on December 1st, 2016 at a price of $150. Traders who believe the price will be below $150
37

per barrel should sell such a contract. Traders who believe the price will be above $150 per barrel should buy such a contract. People with better information about market conditions can profit from their insight and perform the valuable public service of ensuring adequate oil supplies tomorrow. Speculation does not interfere with supply and demand. Speculation is part of the process by which supply and demand adjust.

2.2CONCLUDING REMARKS TO FUNDAMENTAL FACTORS:

From the above fundamental studies it is clear how important their role is in determining the crude oil prices. OPEC which used to be the sole determinant of crude oil supply and thus cater to the market fundamentals is no more the only entity to play the role. The enhanced production by non-OPEC countries has reduced the role of OPEC when compared to history. The role of other emerging economies has affected the demand mechanism. Countries like China and India are now poised to fuel demand which was earlier determined by U.S and the other developed European countries. The role of USD has a huge impact to play on the market dynamics too. Investors switching from one commodity to another to hedge against potential risk have become a regular practice in the commodity market. Of course the role of various Geopolitical events need not be mentioned that have double impact on the commodity. Then finally the role of speculators is increasing. Today more than 70% of the crude oil price movement is said to be the role of speculators.

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2.3ANALYSIS OF TECHNICAL TOOLS USED:

We have taken up five different tools based upon the type of different types of assessment about the market movements that these tools make. These tools are: Candle Stick Patterns. Relative Stochastic Index. Bollinger Band. Average Directional Movement Index (ADX). Directional moving indices (+DI, -DI).

The selection of the above mentioned tools are based upon the logic keeping in mind the variety of studies that one investor can gauge using these tools. The candle studies e.g. can suggest a definite pattern that is prevalent in the market along with the periodic price movements. This study has been taken up as it is a very common tool used by a technical analyst. The Relative Stochastic Index has been taken up as it is a widely used tool to suggest the state the market is entering into namely an overbought position or an oversold position. The Bollinger Band was also taken up as it gave the band in which the market would operate. A very basic feature needed for any trader is to know the level of fluctuations or deviations that the market can experience and the Bollinger Band was an obvious choice. The use of ADX does not need to be mentioned as it is an indicator that suggests the momentum of the market. By this it means how confidently the market is moving up or down. Finally the Directional moving indices have been taken up. Although similar to ADX in terms of being
39

momentum indicators, these tools are specific in determining the type of trend (uptrend or downtrend) and generating the buy or sell signals that the ADX fails to do.

CANDLESTICK STUDY

Since 17th century, Japanese have been using the candlesticks to know the rice prices. One of the most famous trader named M. Homma discovered that emotions of a market could be very useful in determining the future trends. However since early 90s its support has been captivating. The candlesticks contain the same data as normal bar charts but highlight the relation between opening and closing price of the trading period.

40

The major component of a candlestick is the body, i.e. the part that forms the rectangular shape between the open and close points. While traditional Japanese candlesticks use black and white bodies, we use green and red in our representations as we believe the colors better define the market direction and we find them to be visually more striking. A green body means that the close is higher than the open and thus the price has increased over the period, whereas in a red body the closing price is lower than the opening price and the value has decreased over the period. The extension lines at the top and lower end of the candlestick bodies are called the shadows. The pinnacle point on the upper shadow is the high price of the period, while the lowest point on the lower shadow represents the low price of the period.

Candlestick Types: Long Day or Long Line: A candlestick that has a long day is one in which there has been a big difference in opening and closing price compare with previous 5 or 10 trading sessions. Usually the shadows at either end of the candlestick body are quite short, indicating that the market movement was primarily one-directional during the same period.

41

Small Day or Small Line: A candlestick in which there has been a small difference in opening and closing prices compared to previous 5 or 6 trading sessions. It has short trading period with compressed real body that indicate a very little price movement i.e. upward in the case of a green candlestick body, or downwards in the case of a red candlestick body. It has short shadows at either end, indicating very little price fluctuation.

Marubozu: A green Marubozu is a long green body with no shadows at both end and it represents a bullish trend. Similarly, a red Marubozu indicates a bearish trend. Marubozu gives trading signal of trend reversal. These are stronger bull or bear signals than long lines. It generally comes at the start of a continuation

42

Spinning Tops: It has longer shadows than bodies and whether they are green or red is usually not significant as they imply market indecision and the trend is neither bullish nor bearish. The open and close prices for the period are very close, so in real terms the market has not really shifted, although there may have been a high or low spike (or both) during that period.

A Doji is the most extreme case of the spinning top. It occurs when the real body exists as a line i.e. the days opening and closing price are same.

43

A Dragonfly Doji has only one long shadow, on the lower end of the open and close price. This indicates that all price activity during the trading period is on the lower side of the open price, but by the end of the trading period the price has moved back up to the open price. It is a good signal of a bearish trend reversal, i.e. price should now move upwards. A Gravestone Doji is the opposite of a Dragonfly and again has one long shadow, to the high side of the open and close price. It indicates that during the price period all price activity is at the upper end, but that the price retracts back to open price by the end of the trading period. It is a good signal of a bullish trend reversal, i.e. price should now move downwards. A Hammer is a very important indicator of reversal trend and it is named such because the market is attempting to hammer out a market bottom. It is a very good indicator of a bullish trend on the way, whether the body is green or red. The hammer appears during a downtrend only. The body of the hammer has a long shadow on the underside - at least 2-3 times the length of the body and little if any shadow on the upside. The color of the body does not matter.

A Hanging Man is so-called because it has the shape of a man in hanging position with his legs dangling underneath. It occurs during an uptrend only and it is a very good indicator of a trend reversal to a bearish market. The body is at the upper end of the trend and has little or no shadow to the upside. The body has a shadow at least 2-3 times its length to the underside. The color of the body is not important to the trend reversal, other than a red hanging man is more bearish than a green hanging man.

44

Engulfing: when a candlesticks trading period's body completely engulfs that of the preceding period's body. It is an indicator of a trend reversal. When a green body engulfs that of a red body from the preceding period, this is an indicator of a bullish trend. Likewise, when a red body engulfs the green body of the preceding trading period, then this is an indicator of a bearish trend. Engulfing Bullish Engulfing Bearish

A Harami is the reverse of engulfing. The word means impregnated in Japanese. The new body is dwarfed by the trading body from the previous period. It indicates a turnabout and a trend reversal. The body of the current trading period is shorter and fits into the body of the preceding period. The color of the larger body is the opposite color to that of the smaller body.

45

A Morning Star is a bullish indicator and points to a trend reversal. It consists of 1) a long red body during a downtrend, 2) a star with a short green body that is gapped away from the red body and finally 3) a long green body, which is the confirmation of the trend reversal. It happens during a downtrend.

An Evening Star consists of 3 candles - 1) a long green candle, 2) a shorter star candle where the price goes higher and finally 3) a long red candle in the final trading period. This pattern is a good indicator of a trend reversal and is a bearish sign.

Morning Star Bullish

Evening Star Bearish

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The Inverted Hammer usually occurs at the bottom of a downtrend and can indicate a trend reversal. The hammer has a smallish body at the bottom of the price range. It has a very long shadow protruding upwards from the body. It is only evident on a downward trend.

1. Bollinger Band: Bollinger bands consist of a center line and two price channels

(bands) above and below it. The center line is a simple moving average and the price channels are the standard deviations of the stock being studied. The bands will expand and contract as the price action of an issue becomes volatile (expansion) or becomes bound into a tight trading pattern. Upper resistance and lower support lines are first drawn and then extrapolated to form channels within which the trader expects prices to be contained. Some traders draw straight lines connecting either tops or bottoms of prices to identify the upper or lower price extremes, respectively, and then add parallel lines to define the channel within which the prices should move. As long as prices do not move out of this channel, the trader can be reasonably confident that
47

prices are moving as expected. When stock prices continually touch the upper Bollinger band, the prices are thought to be overbought; and conversely, when they continually touch the lower band, prices are thought to be oversold, triggering a buy signal. The figure below shows a Bollinger Band along with the Upper band, lower band, middle band, Overbought and oversold position.

Fig 10: Bollinger Band

2. Average Directional Index (ADX): The Average Directional Movement Index

(ADX) technical analysis indicator describes when a market is trending or not trending. When combined with the DMI+ plus and DMI- minus the ADX can generate buy and sell signals. The first thing to remember is that the direction that the ADX moves doesn't depend upon the direction of the underlying stock. All the ADX shows is that the trend strength.
i. ii.

Strong upward trend of stock = Increasing ADX Strong downward trend = Increasing ADX

The chart below shows the functioning of the ADX

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Fig 11: Average Directional Index

3. Directional Movement Index (+DI, -DI): Part of the ADX indicator, the Directional

Movement Index (DMI) consists of two lines, the DMI plus line (DMI+) and the DMI minus line (DMI-), which generate buy and sell signals. The buy and sell signals are generated as per: DMI Bullish Crossover Buy Signal- When the DMI+ crosses above the DMI-. DMI Bearish Crossover Sell Signal- When the DMI- crosses below the DMI+. Fig 12: Directional Moving Index The chart below shows the working of these indicators:

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4. Relative Stochastic Index: A technical momentum indicator that compares the

magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset. As can be seen from the chart below, the RSI ranges from 0 to 100. An asset is deemed to be overbought once the RSI approaches the 70 level, meaning that it may be getting overvalued and is a good candidate for a pullback. Likewise, if the RSI approaches 30, it is an indication that the asset may be getting oversold and therefore likely to become undervalued

Fig 13: Relative Stochastic Index

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2.4COMPARATIVE ANALYSIS OF FUNDAMENTAL FACTORS AND TECHNICAL TOOLS:

A comparative study of these tools along with the fundamental factors has been done to verify the title and objective of the project. In order to do so we have taken a daily period based view of the market for the year 2008-09. We have taken up specific dates to do a comparison between the two factors. These dates are:

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Fig 14: Technical vs. Fundamental (Feb27th08)

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Date: February 27th 08 The market had been bullish the previous day and the days before and was expected to continue its high ride. What Fundamental Factors said What Technical Factors said Although actual oil inventories (3.2 M) were 1. Candle Sticks: It was a red Marubozu more than that forecast (2.7 M), fear of supply that indicates that the next day would be and speculation of shortage due to increased a bearish one. demand by investors fuelled by fear of supply 2. Bollinger Band: The upper band had not disruption by Nigerian production cut reports been hit and it suggested that the price along with supply disruptions by Iraq and a would go up further which happened major fire at a UK gas terminal, the Royal actually. Dutch Shell Plcs Bacton terminal in England 3. DMI: The ADX value was high and which handles supply flowing from the North suggested that the market would keep on sea into Europes biggest gas consuming the momentum. The +DI stated to divert country. This suggested that the Market would away upwards suggesting strengthening surge upwards. of the buying signal. 4. RSI: The RSI value was high above 60 and suggested that the overbought position was approaching and that the market was close to it.

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Fig 15: Technical vs. Fundamental (March 4th08)

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Date: March 4th08: The market lost further steam and dipped below the previous days close although it had opened higher than the previous days close. The 1st resistance level of $100.29 wasnt breached as expected. But the next day Crude oil rose to $105.97 a barrel, the third day this week New York prices have reached a record, as the U.S. dollar fell to its lowest ever against the euro. Crude oil for April delivery rose to $105.97 a barrel on the New York Mercantile Exchange. What Market fundamental stated The European Central Bank held its key interest rate at a more than six-year high as the Federal Reserve keeps cutting its benchmark rate. The buying of dollar further meant that oil would rise up. Some events such as The bombing of the Transandino pipeline by the Colombian rebels over dispute with Ecuador suggested a rise in oil prices. What technical indicators stated 1. Candle Sticks: The previous day was a red marubozu and the market opened as expected with a dip. But the Current day being also a red marubozu was not consistent as per the candle sticks rule. The next day was bullish for crude oil as the market surged up. 2. Bollinger Band: The upper band had been touched after which the market as expected retraced back but only for a short time. The market then went up. 3. DMI: The +DI started to dip below weakening the buying signal which was inconsistent with the market behaviour. 4. RSI: The oversold position is reached and the confirmation of buy is generated.

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Fig 16: Technical vs. Fundamental (April 9th08)

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Date: 09th April08

The market had been bullish for the past two days. Immediately after that, it showed high volatility and opened at a price higher than the previous days close at 103.86 USD per barrel. The first resistance level of 101.16 had already been breached. The second resistance level was calculated to be 102.35. This resistance level was also crossed and the market kept up surging for almost two weeks. There was a drop of 3.1 million barrels of oil inventories held by major US oil companies. The forecast by the department of EIA was that an additional increase of 2.3 million barrels was supposed to be added.

What Fundamental Factors said When Energy Information Administration reported that the crude oil supplies have declined unexpectedly, the market reacted to it. When the actual crude oil inventories value exceeds the forecast value, the USD appreciates and as the inverse relationship of USD and crude oil goes, the crude oil prices fall and vice-versa. The market was expected to surge and it indeed surged up breaching one resistance level after the other.

What Technical Factors said

1. Candle Sticks: The previous candles

were two double bottom followed by a Marubozo candle that suggested that the next trend would be a bearish one. 2. Bollinger Band: The upper band was hit and as suggested by this tool, the market should retrace back, i.e. now follow a down trend. 3. DMI: The +DI just starts to bend down suggesting a weakening in the buying signal. 4. RSI: The RSI had other things to suggest and with a high value of 60.36 it suggested that the bullish trend would prevail.

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Fig 17: Technical vs. Fundamental (June 17th08)

Date: 17th June08

The market had shown high volatility in the previous days. The market opened at a price higher than the previous days close. The market continued its volatility steam for the next two days and hit the peak. The market hit a new high of 142.33 USD per barrel. After that the market went downhill and was tremendously bearish. The technical analysis suggested that the resistance levels were expected to be at 1st level of $150, 2nd level of $180, 3rd level of $200, 4th level of $300 and well over of $400.

What Fundamental Factors said

What Technical Factors said

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The market fundamentals went in favor of the USD as a result, the market went in favor of the USD while it had negative sentiments against the crude oil. Some very important news came up that have a positive impact on the value of USD. These were: 1. Residential business permits 2. Producers price index 3. Consumer price index

1. Candle Sticks: The previous day was a hanging man followed by a dragon fly doji. 2. Bollinger Band: The previous days price had touched the outer band and that meant the market should retrace back. The market did retraced back and again surged up. 3. DMI: The +DI had started to move downwards signaling the selling position to be taken up. In contrast the market was volatile and moved up. 4. RSI: The RSI had a value of 62.55 and had reached the overbought position. This suggested the sell position to be taken up immediately which was in sharp contrast to the market movement.

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Fig 18: Technical vs. Fundamental (June 27th08)

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Date: June 27th08 Oil prices struck fresh record highs over $142 on Friday [27 Jun 2008] as the US dollar remained weak, while world stock markets tumbled amid economic jitters. The NYMEX crude oil futures contract for Aug 2008 delivery struck an all-time intraday record of $142.99. The jump in oil prices, which have doubled in the past year, has triggered inflation fears and worries that US economic growth could be crimped further. The ailing dollar has fueled demand for oil from traders. What Fundamentals stated What Technical stated The speculation of Libya cutting production 1. Candle Sticks: The previous day was a fuelled concerns of reduced supply. Libya bullish candle. The current day was an produced 2.2% of the total global supply in the inverted hammer that suggested that the year 2007. Hence this had severe impact on the market should go up and the market market. Further the Federal Reserve gave no moved up with high volatility. signals for further interest cuts due to already 2. Bollinger Band: The market moved up weak dollar as a result of which oil rode high. to touch the upper band as it had not been hit. After it hit the band, the candles crossed the band and then only took a turn back. 3. DMI: The +DI started moving downwards and the decrease in buying pressure was indicated which was in contrast to what the market suggested. 4. RSI: The RSI with a very high value of over 65 had reached the peak confirming the overbought position and then took a downturn confirming a sell whereas the market moved up.

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Fig 19: Technical vs. Fundamental (July 14th08)

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Date: July 14th08 The crude oil prices had surged up to the previous day to touch the highest level of $147.2. The next day started bearish and the market took a downturn. What Fundamental Stated What Technical stated The trade balance report showed some favorable 1. Candle Sticks: The previous day was an results. The actual value stood at -59.8 USD as indecision candle and the current day against the forecast value of -62.5 USD. This was a bearish Marubozu that signaled resulted in swinging the market in favor of the the market to take a downturn. USD and against the crude oil. The market took 2. DMI: The ADX value was in sharp a downturn as expected. Further Since heavy contrast to what the +DI and DI investment in oil bonds had reached to a huge suggested. The ADX value maintained figure resulted in lessening of these bonds value that the market would continue its up thus pushing the market down. steam. On the other hand the weakening of the +DI signaled that the selling position was to be taken which in other words meant weakening of the buy signal.

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Fig 20: Technical vs. Fundamental (Sep 2nd08)

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Date: September 208 The market had been bearish the previous days and it continued to do so. The market opened well below the previous days close. The 1st support level of $115.84 and the 2nd support level of $114.21 predicted for the oil price could not stop the market from falling again. The next day the market did open at price higher above the current days closing price but closed below the current days closing price. What Fundamental stated What Technical stated The occurrence of Hurricane Gustav had fuelled 1. Candle Sticks: The previous day was a speculation about a major disruption in the bearish candle and the current day was a crude oil supply. But confirmation that the hammer suggesting that the market actual impact has not been that powerful as would move up the next day and expected led to investors running away from the continue so. But the market took a crude oil. Further the worsening global severe downturn and kept falling. economy thus hampering the demand for crude 2. Bollinger Band: The lower band was hit oil meant that the price would continue falling. and that meant that the market would Investors also started favoring the USD as it bounce back and surge upwards. But the continued to gain strength against the Euro. market kept moving touching the lower band. 3. DMI: The MDI suggested that investor should take a buying position. The DI moved downwards giving this indication. 4. RSI: The RSI moved downwards and suggested that the market is heading towards the oversold position.

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Fig 21: Technical vs. Fundamental (Oct 8th08)

Date: October 8th08 The crude oil market kept falling and went below $90 per barrel. The fluctuation intensified and the market kept moving downwards. What Fundamentals stated What Technical stated The EIA reported the actual crude oil 1. Candle Sticks: The previous day was a inventories to be much higher against the bearish indecision candle. The current forecast value. The actual oil inventories stood day was an inverted hammer that at 8.1M which was more than 4 times than the suggested that the pattern should forecast value of 2.0M. Thus as per the market reverse. The next trend would be bullish. fundamentals, it was good for the USD and bad 2. Bollinger Band: The Bollinger band for the crude oil. It suggested the crude oil suggested that the market should move market should move down up and continued as it had hit the lower band. The market confirmed with this for the next day but again started moving towards the lower band. 3. DMI: A strengthening of the buy signal was stated by this tool that suggested that that the market would move up. 4. RSI: The RSI had a low value of around 33 and it further moved down suggesting that the oversold position is fast approaching which was in tandem with the market prices.

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Fig 22: Technical vs. Fundamental (Nov 3rd08)

Date: November 3rd08

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The market kept losing out in terms of crude. The downturn continued. The resistance point and the pivot point as estimated did not work out and the market behaved in its own way.

What Fundamentals stated What Technical stated The economic slowdown intensified and the 1. Candle Sticks: The previous day was a crude oil prices fell sharply. Further the report bullish candle. The current day was an of a tremendous liquidity crisis due to the inverted hammer that suggested that the approaching US elections pushed the market trend would reverse and that the next down. Institute of supply management is a trend would be bullish. But the market leading indicator of economic health took a downturn instead. businesses react quickly to market conditions, 2. Bollinger Band: The lower band was and their purchasing managers hold perhaps the touched which suggested that the market most current and relevant insight into the would bounce back upwards. company's view of the economy. When the 3. DMI: The +DI moved down suggesting actual value exceeds the forecast value, the that the market is losing the upward USD is positively impacted and the crude oil steam. But at the same time the DI prices fall. This is in sync with the market moved upwards not giving any clear cut behavior. Traders consider this as very high signal of a possible position to be taken. impact news. 4. RSI: The RSI was dipping down with a low value of around 25. It gave a signal of oversold position suggesting a possible buy. The market stated otherwise.

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Fig 23: Technical vs. Fundamental (March 18th09)

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Date: March 18th09 The market was on a bullish ride the previous days. The current day was bearish and the next day continued the bullish sentiments. What Fundamentals stated What Technical stated The core consumer price index had figures 1. Candle Sticks: The candle patterns failed where actual value was lesser than the forecast to suggest anything due to occurrence of value that went against the USD. This had the indecision candle on the current immediate impact where the crude oil price fell. trading day. The crude oil inventories also rose than 2. Bollinger Band: The BB suggested that expected and this also caused the market to fall since the upper band has been reached, immediately but the other important news such the market would fall. But the market as Consumer price index and Federal funds rate stuck to the upper band and continued to spiked up the prices. spike up for the other coming days. 3. DMI: The +DI suggested to go for the sell option which was also suggested in the previous days also but the market had been moving up. 4. RSI: The RSI had suggested an overbought position although a weaker signal. The market surged up for the future trading days.

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3. OBSERVATIONS:
The above comparisons have much well confirmed that market still remains more faithful to fundamentals rather than technical tools. There have been cases when certain tools have behaved in tandem with the fundamental factors but as it can be seen from the table below that the various tools in a majority of cases have contradicted each other in their prediction of taking a position. Some tools have even failed to generate a confident signal. The table below states the summary of the above studies. It gives a clear picture of what the correct position should have been either buy or sell (B/S), what the fundamental stated and what the technical tools stated. S. No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Date February 27th 2008 March 4th 2008 April 9th 2008 June 17th 2008 June 27th 2008 July 14th 2008 September 2nd 2008 October 8th 2008 Dec 3rd 2008 March 18th 2009 Correct Entry Position Buy Buy Buy Buy Buy Sell Sell Sell Sell Buy Fundamental Buy Buy Buy Buy Buy Sell Sell Sell Sell Buy Candle Sticks Sell Sell Sell -----Buy Sell Buy Buy Buy ----B.B Buy Sell Sell Sell Buy -----Buy Buy Buy Sell DMI Buy Sell Sell Sell Sell -----Buy Buy ----Buy RSI Sell Buy Buy Sell Sell Sell Buy Sell Buy Sell

Table 5: Observation table

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4.

RECOMMENDATIONS:

It is kindly recommended by the project to the investors and the financial analysts of COSMO TRADEX that to trade effectively, the first step is to first realize that market fundamentals are still intact and that although they have been dominated off late by speculators and although a lot of arguments about weakening of market fundamentals has risen, they are still the core drivers of prices. The very basic fundamental factors stated are the ones to be looked into. Further the components of these fundamental factors are fast diversifying. These factors should be looked into detail to understand the market better. Various reports that come up for instance such as The Energy Information Administration reports give deep insights into the crude oil markets and the industry as a whole. The role of OPEC and the dependence on USD also need to be studied to understand how they drive crude oil prices. This is especially the basic requirements for long term traders. As per as the technical tools are concerned, the simple tools can be used. Since none of the tools is sacrosanct in its prediction, a combination of various simple tools can be used. ADX for example is an excellent tool because determining whether the market is trending or nontrending can help a trader avoid pitfalls of some indicators. Moving averages give best results in trending markets and oscillators in non-trending markets. Thus by use of ADX a trader can realize which one to go for. Simple chart patterns can be used such as the most popular candle stick studies which have been used over many years and are still a reliable source to study the market. Other very effective tools are Bollinger bands and RSI. Finally if you do not get to any conclusion, Cosmo Tradex awaits you.

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5. CONCLUSION:
The commodity market is a lesser known area for interested investors who constantly seek after the equity market for making profits. Needless to say that this notion is weathering away as more and more investors are getting aware about this market as this provides greater risk coverage than the equity markets. This awareness has been bolstered by the work of some investing companies who provide a tremendous platform to invest in this very lucrative market to reap profits. By the use of some very useful technical tools and understanding the market fundamentals one can really get insights about this market and ride on high returns.

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6. REFERENCES:

a) BOOKS:

1. Practical Application of financial analysis Joe DiNapoli 2. Technical Analysis for short term trading Martin J. Pring 3. Japanese candlestick charting techniques - Steve Nison

b) WEBSITES:

1. www.netdania.com 2. www.forexfactory.com

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3. www.oilmarketer.co.uk/oil/inventories/ 4. www.barchart.com 5. www.wtrg.com 6. www.kerfordfx.com 7. www.investopedia.com

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