Hello and welcome to CantosCharts. My name is Michael Hewson, Market Analyst at CMC Markets. Today I'm going to look at oil prices.

Everyone knows what oil prices have been doing over the past few weeks. It's been all over the news with respect to the Middle East, the unrest in Tunisia, in Egypt, in Libya, in Bahrain. The risk premium has basically driven oil prices through the roof and more so with Brent Crude.

So this is Brent Crude three year chart and I've drawn a nice upwards channel here from the lows in August which was around about $65 a barrel. What we've done is we've broken out above it. We've also got this significant down move here, the all-time highs at $147.50 to the lows around about $36.20. 61.8 per cent retracement area was around $105 for Brent Crude. We've broken above that. We stayed above that.

The key level for me on the upside on crude oil and could be the tipping point for equities in terms of risk appetite and a correction lower is to $121.23 to be exact if you're going to nit-pick. I would say $121. $121 a barrel. If we close above that we could potentially come back to these highs around $147.50. If we do that, then that's going to be negative for equities because it is going to certainly impinge on company profit margins, company profitability and could turn equities over to the downside.

At the moment, while we're trading between this $105 area and $121 it's not great in terms of costs of doing business, but it's also not an absolute killer to the equity market rally that we've seen over recent weeks and months. But a lot will depend on how things pan out in the Middle East and obviously there is also the wild card with respect to what's happening in Japan and the nuclear situation there. So that's Brent Crude prices.

Now Brent Crude prices have outperformed West Texas. At the end of this I'm going to also look at a spread chart to give you an indication of how the spreads have been performing because that has also been quite a big item in the news.

So that's Brent. Look at the contrast with West Texas. We haven't seen the break to the top side in West Texas. Again, we've got the same down move $147.30 to the lows at $33.50, $32.40 in 2009 which is basically around about the same time as global equity markets bottomed out and then started ratcheting higher. Since then we've seen oil prices track the equity market, but at some point oil doesn't become a growth story, it becomes a negative growth story when oil prices start to get much too high relative to equity prices and they start to push equity markets back down again. Now with US Crude that hasn't happened generally because they don't have the same supply issues.

So what we've got here is we've struggled to close about the 61.8 per cent retracement which is around about $104 a barrel. If it can gain traction, the US Crude price above $104 a barrel, we could see a very sharp move up to $120 a barrel and that would be a concern. It certainly would be a major concern for risk appetite. Again, we've got the key support lines here around about $92. These two lows here from the past couple of weeks around about $95/$96 dollars a barrel. What I would like to see is for this to continue to rebuff the US Crude price and look to push below these series of lows around about $95.50 and correct back to this retracement here which is 50 per cent retracement of this move. So 61.8% at $104. $90 is the 50 per cent. As long as we can stay within this range I think the equity market rally could continue barring any other mishaps or any other geopolitical factors that could impact risk appetite.

Let's look at the spread chart. Spread chart over the past five years has been fairly constant apart from a couple of commodity price spikes that we saw in 2008 here and here. Broadly, it has traded around the zero line and it has always been $2 either side of zero. Since the end of 2010 where we've seen a significant spike in volatility, the Brent spread is now significant outperforming the WTI spread and it's now finding support around the $7 area and that's basically the differential between Brent and WTI. It hit a peak of 19 a barrel earlier in 2011 and I think that could well be the limit because at some point the spread just becomes too wide to be maintainable, so that seems to be the cut off point. But for them to move back into line I would like to see the differential come back below $7 a barrel and come back into line here.

How will that play out? It's difficult to say. Will Brent Crude prices come off? Well the only way that I can see that happening is if the situation stabilises in the Middle East and that doesn't look likely in the near term. I think it's more likely that WTI will start to catch it up and that could be for any number of reasons. It may be supply concerns within the US or a deterioration of the situation within Japan. At the end of the day I haven't got a crystal ball. I don't know, but the key chart point for me in terms of the spread is this $7 mark. We need to basically get back in-between that, get less than $7 and we could see a move back in line with the spread.

Okay, so that's pretty much it for the Brent Crude, WTI and the spread charts. I hope you found that informative. Thanks very much for listening. My name is Michael Hewson from CMC Markets and this is CantosCharts.