Technical Analysis | Trading: 2014-09-26 | IFCM
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Technical Analysis - Trading: 2014-09-26

Petrobras not afraid of oil

Good afternoon, dear traders. Today we draw our attention to rapidly developing countries of Latin America, Brazil. One of the largest companies with public ownership (54%) Petroleo Brasileiro SA (Petrobras) engaged in extraction and processing of oil products, as well as power generation, including biofuel. In Brazil Petrobras is also the leading supplier of natural gas, and the gas infrastructure of the entire country belongs to the company. From 2007 to 2013 the company’s revenue rose by 63% to $141 billion. The government backing allowed attract loans freely for new infrastructure projects.

As of the last quarter, PBR has a balance sheet value of $24.67 per stock, against the current market price of $15.63: the company’s stocks are undervalued. It should be noted that the ratio of company capitalization, taking all the sources of funding into account (EV), and the profit (EBITDAX) is now 3.21. This helps noting the potential development of the company due to new minefields and technologies of geological exploration. In 2014-2018 Petrobras is planning to spend more than $150 billion on these projects. We also note that several new deposits have been developed this year, including the largest one Apollonia Well which was opened in mid-August. New deposits have permitted to increase the oil production to 520 000 barrels per day. The current capacities allow raising this number to 4 million barrels by 2020. If it happens, Petrobras will enter the top five largest oil companies in the world.

However, note that the company’s revenue depends greatly on energy costs. In the last 20 days the correlation between #S-PBR and #C-BRENT was 83%. The price of Brent futures has lost 10% since July, falling below $100 per barrel. The process is explained first of all by increased supply for the product by the US mostly. In May the oil products exports from the United States rose to its highest level since 1999: 288.000 barrels per day, including new offshore deposits. We pay attention to the lifting of Iran sanctions on oil exports, which limited considerably the supply last year.

Therefore, despite the investment attractiveness #S-PBR includes significant risks, associated with energy market. In order to protect the investments in this asset, we hedge the risks by quoting stocks through Brent futures (# C-BRENT). Let us compose a pair spread instrument in NetTradeX: #S-PBR/#C-BRENT . The composite instrument is formed by quoting Petrobras stocks against the Brent continuous futures. Note that the price of the each asset included in the pair instrument is calculated automatically by the program in USD. Buying the synthetic spread is identical to buying Petrobras stocks and simultaneous selling of Brent on the basis of currency cross-rate model.

The daily chart of the hedging spread was composed in NetTradeX and includes the opening and closing prices. As you can see on the chart, the spread is market neutral: the price has risen by 8% since July 15, it can be compared to the Brent falling of 10%. A high correlation level suggests that the strategy of average reverse can be used. We use the exponential moving average with the correlation period, i.e. 20 days. At the moment the price fell below the signal, and we expect the upward reversal near the support trend line.

A pending buy order can be placed above the fractal resistance at 1.10103. In our opinion, this mark intersection would lead to Parabolic reversal and the return of the RSI signal into the trend channel area above the resistance 53%. Risks can be placed below the last support at 0.89101. As the trend continues Trailing Stop is to be moved after the next fractal trough to the breakeven point.

Directionup
Buy stopabove 1.10103
Stop lossbelow 0.89101

For more information about the portfolio operations, you can read on our website Quick Guide for Creating and Trading PCI.

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Note:
This overview has an informative and tutorial character and is published for free. All the data, included in the overview, are received from public sources, recognized as more or less reliable. Moreover, there is no guarantee that the indicated information is full and precise. Overviews are not updated. The whole information in each overview, including opinion, indicators, charts and anything else, is provided only for familiarization purposes and is not financial advice or а recommendation. The whole text and its any part, as well as the charts cannot be considered as an offer to make a deal with any asset. IFC Markets and its employees under any circumstances are not liable for any action taken by someone else during or after reading the overview.

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