abani project

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SUBMITTED BY: ABANIKANTA SAHOO (09BSHYD0011)

NAME OF THE ORGANISATION: COSMO TRADEX PVT

LTD.

1

REPORT

ON

A STUDY ON CRUDE OIL PRICE

CHANGES WHEN FUNDAMENTAL

FACTORS OUT WEIGH TECHNICAL

TOOLS


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REPORT

ON

A STUDY ON CRUDE OIL PRICE

CHANGES WHEN FUNDAMENTALFACTORS OUT WEIGH TECHNICAL

TOOLS

BY

ABNAIKANTA SAHOO

ENROLLMENT NO. 09BSHYD0011

BATCH- 2009-11

A report submitted in partial fulfillment of the requirements of MBA programof

ICFAI Business School

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SUBMITTED TO

MR. PRATYUSH NANDA PROF.SANJAYADLKEHA COMPANY GUIDE FACULTYGUIDE COSMO TRADEX PVT. LTD ICFAI

BUSINESS SCHOOL BHUBANESWARBHUBANESWAR

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 thetechnical 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.

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TABLE OF CONTENTS

Page

ACKNOWLEDGEMENTS3

EXECUTIVE SUMMARY 4

1. INTRODUCTION..8

1.1ABOUT THE COMPANY 8

1.2PURPOSE OF THE PROJECT.

11

1.3SCOPE OF THE PROJECT..

11

1.4LIMITATIONS OF STUDY.

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1.5METHODOLOGY FOLLOWED.....12

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1.6BACKGROUND INFORMATION..

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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

2.1FUNDAMENTAL FACTORS AFFECTING CRUDE OIL PRICES. 19

2.2CONCLUDING REMARKS TO FUNDAMENTAL FACTORS..

32

2.3ANALYSIS OF TECHNICAL TOOLS..

33

2.4 COMPARATIVE STUDY OF FUNDAMENTAL ANALYSIS AND

TECHNICAL TOOLS.

43

3. OBSERVATIONS.

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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).

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

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

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4. Table 4: Geopolitical issues (2008)

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5. Table 5: Observation table..

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6. Figure1: Historical price of crude oil

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

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

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

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

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

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

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

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

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15.Fig 10: Bollinger Band..

41

16.Fig 11: Average Directional Index...

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17.Fig 12: Directional Moving Index

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18.Fig 13: Relative Stochastic Index.

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

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

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

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

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

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

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

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

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

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

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1.1 ABOUT THE COMPANY

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INTRODUCTION


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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 andinstitutional 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 introducingElectronic 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 stronglybelieves 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 pricefluctuation 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 ofdates 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 atwhich 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 isworth 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 thatthey 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 2001 2002 2003 2004 2005 2006 2007

NORTH AMERICA7,213.

1 7178.8 7191.3 7140.1 6823.9 6538.3 6447.8 6499.1

LATIN AMERICA9,316.

5 9327.4 9474.5 9549.4 9961.8 10130.3 10077.8 9796.1

EASTERNEUROPE

7,630.

6 8249.6 9040.0 9960.9 10745.7 11083.2 11532.4 11996.7

WESTERNEUROPE

6,287.

5 6033.6 5951.6 5628.2 5374.9 4905.1 4501.5 4320.4

MIDDLE EAST 21,410. 20776.6 18618.3 20408.5 21981.5 22722.0 22887.0 22495.2

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4

AFRICA6,745.

6 6613.3 6429.2 7246.4 8276.9 8815.7 8958.4 9065.7

ASIA and PACIFIC7,253.

2 7207.6 7275.9 7287.7 7347.1 7445.9 7310.7 7309.2

Total World

65,856.

9

65,386.

9 63980.8 67221.1 70511.7 71640.5 71715.5 71482.3

OPEC28,873.

328,008.

3 25595.3 28187.9 31076.8 32305.7 32448.6 32077.1

OPEC percentage 43.8 42.8 40.0 41.9 44.1 45.1 45.2 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) Final volume asper actualworking capacity(mbpd)

(%)Change inNYMEX crudeoil prices

November06 Doha -1.2 26.3 0.82

February07 Abuja -0.5 25.8 6.84

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November07 Vienna 0.5 27.25 10.45

September08 Vienna -0.52 28.8 -27.21

October08 Vienna -1.5 27.3 -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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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.

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

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.

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 leadingindicator of economic health because building construction produces a wide-

reaching 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-on-

year.

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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 therecession.

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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 theleverage 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 World Events Market Fluctuation25/02/2008 Turkish military operations

inside northern Iraq and onnew warnings from Iran overits nuclear ambition

WTI increased by $0.54 to$99.35Brent crude gained $0.52 to$97.53

28/05/2008 Threats in Nigeria, as a rebelgroup said it would carry out

new attacks on oil facilities

WTI increased by $2.13 to$130.98

Brent crude gained $1.58 to$129.89

10/07/2008 Tension in Africa and MiddleEast, as militant groupthreatened attack on Nigeriadelta


30/07/2008 Israeli Prime Minister EhudOlmert resignation feared apossible attack on Iranian byits successor


21/08/2008 Events adding tensions in the

region over the conflictbetween Georgia and Russia.

WTI increased by $5.67 to

$121.23Brent crude gained $5.97 to$120.33

27/08/2008 Fear of Tropical Storm Gustavto hit as hurricane in the oilfacilities of Gulf of Mexico.


Table 4: Geopolitical issues (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

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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 inflationhave a highly positive correlation. Therefore the investment in gold represents anexcellent way of protecting one's purchase power. The dollar has lost 95% of its valuesince the establishment of the Federal Reserve in 1913 (source: Fed inflationcalculator), whereas gold has increased from USD 20.67 to above 1,000 by a factor of50.

Gold is used as a hedge against the USD.

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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.

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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 almostcrossed 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 moneyflow 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

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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 supplyand demand adjust.

2.2CONCLUDING REMARKS TO FUNDAMENTAL FACTORS:

From the above fundamental studies it is clear how important their role is in determining thecrude 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 thecrude 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

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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.

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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.

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Small Day or Small Line: A candlestick in which there has been a small difference inopening 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

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Spinning Tops: It has longer shadows than bodies and whether they are green or red isusually 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.

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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 thehigh 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.

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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 newbody is dwarfed by the trading body from the previous period. It indicates a turnabout and atrend reversal. The body of the current trading period is shorter and fits into the body of thepreceding period. The color of the larger body is the opposite color to that of the smallerbody.

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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

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

The chart below shows the functioning of the ADX

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http://www.investopedia.com/terms/o/overbought.asphttp://www.investopedia.com/terms/o/oversold.asphttp://www.investopedia.com/terms/o/overbought.asphttp://www.investopedia.com/terms/o/oversold.asp


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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 IndexThe chart below shows the working of these indicators:

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4. Relative Stochastic Index: A technical momentum indicator that compares themagnitude 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) weremore than that forecast (2.7 M), fear of supplyand speculation of shortage due to increaseddemand by investors fuelled by fear of supplydisruption by Nigerian production cut reportsalong with supply disruptions by Iraq and amajor fire at a UK gas terminal, the RoyalDutch Shell Plcs Bacton terminal in Englandwhich handles supply flowing from the Northsea into Europes biggest gas consumingcountry. This suggested that the Market wouldsurge upwards.

1. Candle Sticks: It was a red Marubozuthat indicates that the next day would bea bearish one.

2. Bollinger Band: The upper band had notbeen hit and it suggested that the pricewould go up further which happenedactually.

3. DMI: The ADX value was high andsuggested that the market would keep onthe momentum. The +DI stated to divertaway upwards suggesting strengtheningof the buying signal.

4. RSI: The RSI value was high above 60and suggested that the overboughtposition was approaching and that themarket 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 What technical indicators stated

The European Central Bank held its keyinterest rate at a more than six-year highas the Federal Reserve keeps cutting itsbenchmark rate. The buying of dollarfurther meant that oil would rise up.Some events such as The bombing of theTransandino pipeline by the Colombianrebels over dispute with Ecuadorsuggested a rise in oil prices.

1. Candle Sticks: The previous day was ared marubozu and the market opened asexpected with a dip. But the Current daybeing also a red marubozu was notconsistent as per the candle sticks rule.The next day was bullish for crude oil asthe market surged up.

2. Bollinger Band: The upper band hadbeen touched after which the market asexpected retraced back but only for ashort time. The market then went up.

3. DMI: The +DI started to dip belowweakening the buying signal which wasinconsistent with the market behaviour.

4. RSI: The oversold position is reachedand the confirmation of buy isgenerated.

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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.


When Energy Information Administration

reported that the crude oil supplies have

declined unexpectedly, the market reacted to

it. When the actual crude oil inventories valueexceeds 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.

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 trendwould 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 nexttwo 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.


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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 havea positive impact on the value of USD. These

were:

1. Residential business permits2. Producers price index3. Consumer price index

1. Candle Sticks: The previous day wasa hanging man followed by a dragonfly doji.

2. Bollinger Band: The previous daysprice had touched the outer band andthat meant the market should retrace

back. The market did retraced backand again surged up.

3. DMI: The +DI had started to movedownwards signaling the sellingposition to be taken up. In contrastthe market was volatile and movedup.

4. RSI: The RSI had a value of 62.55and had reached the overboughtposition. This suggested the sellposition to be taken up immediatelywhich 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 andworries 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 productionfuelled concerns of reduced supply. Libyaproduced 2.2% of the total global supply in theyear 2007. Hence this had severe impact on themarket. Further the Federal Reserve gave nosignals for further interest cuts due to already

weak dollar as a result of which oil rode high.

1. Candle Sticks: The previous day was abullish candle. The current day was aninverted hammer that suggested that themarket should go up and the marketmoved up with high volatility.

2. Bollinger Band: The market moved up

to touch the upper band as it had notbeen hit. After it hit the band, thecandles crossed the band and then onlytook a turn back.

3. DMI: The +DI started movingdownwards and the decrease in buyingpressure was indicated which was incontrast to what the market suggested.

4. RSI: The RSI with a very high value ofover 65 had reached the peak confirmingthe overbought position and then took a

downturn confirming a sell whereas themarket 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 favorableresults. The actual value stood at -59.8 USD asagainst the forecast value of -62.5 USD. Thisresulted in swinging the market in favor of theUSD and against the crude oil. The market tooka downturn as expected. Further Since heavyinvestment in oil bonds had reached to a huge

figure resulted in lessening of these bonds valuethus pushing the market down.

1. Candle Sticks: The previous day was anindecision candle and the current daywas a bearish Marubozu that signaledthe market to take a downturn.

2. DMI: The ADX value was in sharpcontrast to what the +DI and DIsuggested. The ADX value maintained

that the market would continue its upsteam. On the other hand the weakeningof the +DI signaled that the sellingposition was to be taken which in otherwords meant weakening of the buysignal.

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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 1 st 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 fuelledspeculation about a major disruption in thecrude oil supply. But confirmation that theactual impact has not been that powerful asexpected led to investors running away from thecrude oil. Further the worsening globaleconomy thus hampering the demand for crudeoil meant that the price would continue falling.Investors also started favoring the USD as itcontinued to gain strength against the Euro.

1. Candle Sticks: The previous day was abearish candle and the current day was ahammer suggesting that the marketwould move up the next day andcontinue so. But the market took asevere downturn and kept falling.

2. Bollinger Band: The lower band was hitand that meant that the market wouldbounce back and surge upwards. But themarket kept moving touching the lowerband.

3. DMI: The MDI suggested that investorshould take a buying position. The DImoved downwards giving thisindication.

4. RSI: The RSI moved downwards andsuggested that the market is headingtowards 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 statedThe EIA reported the actual crude oilinventories to be much higher against theforecast value. The actual oil inventories stoodat 8.1M which was more than 4 times than theforecast value of 2.0M. Thus as per the marketfundamentals, it was good for the USD and badfor the crude oil. It suggested the crude oilmarket should move down

1. Candle Sticks: The previous day was abearish indecision candle. The currentday was an inverted hammer thatsuggested that the pattern shouldreverse. The next trend would be bullish.

2. Bollinger Band: The Bollinger bandsuggested that the market should moveup and continued as it had hit the lowerband. The market confirmed with thisfor the next day but again started

moving towards the lower band.3. DMI: A strengthening of the buy signalwas stated by this tool that suggestedthat that the market would move up.

4. RSI: The RSI had a low value of around33 and it further moved downsuggesting that the oversold position isfast approaching which was in tandemwith 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 statedThe economic slowdown intensified and thecrude oil prices fell sharply. Further the reportof a tremendous liquidity crisis due to theapproaching US elections pushed the marketdown. Institute of supply management is aleading indicator of economic health -businesses react quickly to market conditions,and their purchasing managers hold perhaps themost current and relevant insight into thecompany's view of the economy. When the

actual value exceeds the forecast value, theUSD is positively impacted and the crude oilprices fall. This is in sync with the marketbehavior. Traders consider this as very highimpact news.

1. Candle Sticks: The previous day was abullish candle. The current day was aninverted hammer that suggested that thetrend would reverse and that the nexttrend would be bullish. But the markettook a downturn instead.

2. Bollinger Band: The lower band wastouched which suggested that the marketwould bounce back upwards.

3. DMI: The +DI moved down suggesting

that the market is losing the upwardsteam. But at the same time the DImoved upwards not giving any clear cutsignal of a possible position to be taken.

4. RSI: The RSI was dipping down with alow value of around 25. It gave a signalof oversold position suggesting apossible buy. The market statedotherwise.

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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 statedThe core consumer price index had figureswhere actual value was lesser than the forecastvalue that went against the USD. This hadimmediate impact where the crude oil price fell.The crude oil inventories also rose thanexpected and this also caused the market to fallimmediately but the other important news suchas Consumer price index and Federal funds ratespiked up the prices.

1. Candle Sticks: The candle patterns failedto suggest anything due to occurrence ofthe indecision candle on the currenttrading day.

2. Bollinger Band: The BB suggested thatsince the upper band has been reached,the market would fall. But the marketstuck to the upper band and continued tospike up for the other coming days.

3. DMI: The +DI suggested to go for the

sell option which was also suggested inthe previous days also but the markethad been moving up.

4. RSI: The RSI had suggested anoverbought position although a weakersignal. The market surged up for thefuture 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 havebehaved 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.

Date CorrectEntry

Position

Fundamental CandleSticks

B.B DMI RSI

1. February 27th

2008Buy Buy Sell Buy Buy Sell

2. March 4th

2008Buy Buy Sell Sell Sell Buy

3. April 9th 2008 Buy Buy Sell Sell Sell Buy

4. June 17th

2008Buy Buy ------ Sell Sell Sell

5. June 27th

2008Buy Buy Buy Buy Sell Sell

6. July 14th 2008 Sell Sell Sell ------ ------ Sell

7. September 2nd

2008 Sell Sell Buy Buy Buy Buy

8. October 8th

2008Sell Sell Buy Buy Buy Sell

9. Dec 3rd

2008Sell Sell Buy Buy ----- Buy

10. March 18th

2009Buy 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 ofCOSMO 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 non-

trending 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
http://www.oilmarketer.co.uk/oil/inventories/http://www.barchart.com/http://www.wtrg.com/http://www.kerfordfx.com/http://www.investopedia.com/http://www.oilmarketer.co.uk/oil/inventories/http://www.barchart.com/http://www.wtrg.com/http://www.kerfordfx.com/http://www.investopedia.com/

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