Musings from the Oil Patch
Comment of the Day

July 26 2013

Commentary by Eoin Treacy

Musings from the Oil Patch

to a subscriber for this edition of Allen Brooks ever educative report for PPHB
which may be of interest to subscribers. This month's report which is posted in
the Subscriber's Area focuses on the economics of shale drilling but here is a
section on the automotive sector
The resurgence of the U.S. automobile industry has been surprising, although it has benefited from the past delay in auto purchases due to the financial crisis and subsequent recession and the extremely cheap credit available. With the exception of the Cash for Clunkers government program that boosted vehicle sales for a brief period, since the late summer of 2009 at the end of the recession, the volume of monthly auto sales has been straight up. While reflecting a significant recovery, monthly auto sales have yet to reach levels that persisted for most of the early 2000s until the financial crisis in 2007. Will auto sales reach those historical levels, or will the monthly rate moderate while remaining at a healthy level?

From a global perspective, the health of the Chinese and U.S. auto markets is extremely important for the global oil market, as reflected by the first half of 2013 sales figures compared to last year. If the European Union and Japan auto sales comparisons were to become positive, or at least not be significantly negative, global vehicle demand will become quite strong, as long as all other markets remain stable. Counting on improved contributions from those two markets is questionable given their current demographic, economic and political forces. It doesn't appear these factors will improve materially, especially with respect to demographic trends. Any improvement should trigger an upward move in auto sales, but a sustained upward trend will require time to become established in our view given the amount of economic damage inflicted on these countries over the past half-decade.

Eoin Treacy's view The automotive sector tends to be rather heavily influenced by perceptions of the strength or otherwise of the global economy. However cars now represent a global growth market since car ownership is an ambition for those moving up the GDP per capita scale.

The gradual recovery of US auto demand has been a welcome outcome for companies with particular interest in that market. GM rallied to break above its 200-day MA last September and has found support in the region of the trend mean on successive occasions since. It is currently somewhat overbought so potential for a reversionary move has increased, but a sustained move below $31 would be required to question medium-term upside potential. Ford has a broadly similar pattern since September and is also susceptible to mean reversion as it tests the 2011 peak. Tesla Motors found support in the region of $100 from mid July and a sustained move below that level would be required to question medium-term potential for additional upside.

Among European automakers Daimler surged about the psychological €50 three weeks ago and while somewhat overbought in the short term, a sustained move below the 200-day MA, currently near €45, would be required to question medium-term recovery potential. Renault has a similar pattern.

Volkswagen, BMW, Volvo and Porsche are rallying towards the upper side of their respective ranges.

Fiat found support in late June at the upper side of its more than yearlong base and continues to rebound while Peugeot Citroen completed a six month base three weeks ago and is now susceptible to some consolidation.

The majority of Japan's automotive companies bounced impressively from their May lows but are encountering resistance in the region of their respective peaks. Toyota in particular pulled back sharply today while Daihatsu, which has been a market leader, is also encountering resistance. While some consolidation of recent gains remains likely, sustained moves below their respective trend means would be required to question medium-term recovery potential.

India's Tata Motors has lost momentum and will need to hold its medium-term progression of higher reaction lows if upside is to be given the benefit of the doubt. Maruti Suzuki is testing its progression of higher lows, while Hero Motors is outperforming and rallied this week to break its medium-term downtrend.

South Korea's Hyundai has rallied to break the medium-term progression of lower rally highs while Kia has also firmed having found support near the psychological KRW50,000 earlier this year.

Greatwall Motors is the most internationally present of China's car companies. The share found support in the region of the 200-day MA near HK$30 from late June. While there is some additional scope for consolidation, a sustained move below that level would be required to question medium-term upside potential. Geely Motors and Brilliance Automotive have held progressions of higher major reaction lows 2011. Shanghai Automotive, Yulon Automotive and Dongfeng Automotive have been largely rangebound for almost two years and recently tested the lower boundary where they found at least short-term support.

The above shares suggest that while there is some potential for consolidation in the short-term, the medium-term outlook remains bullish.

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