OGJ Senior Writer
The December crude contract climbed 0.9% Nov. 3 in the New York Mercantile Exchange when Federal Reserve Chairman Ben Bernanke announced plans to buy $600 billion of Treasuries over the next 8 months to stimulate the US economy, triggering a sharp drop in the US dollar.
On Nov. 4, the crude price jumped 2.1% to the highest level since Apr. 6. On Nov. 5, it inched up 36¢ to $86.85/bbl, hitting a 2-year intraday high of $87.43/bbl in the process, primarily in reaction to the Fed proposal. “Apparently, the market needed some time to make up its mind,” said analysts in the Houston office of Raymond James & Associates Inc. The broader market shot higher with the Standard & Poor’s 500 Index up 1.9% to levels not seen since 2008. Energy stocks outperformed the broader market as the dollar fell 0.4% against the euro to the lowest level since Jan. 20.
Oil prices rose more that 15% after the market learned there would be a second round of quantitative easing (QE2). “It looks likely that $90/bbl will be tested within days,” said analysts at KBC Energy Economics, a division of KBC Advanced Technologies PLC.
However, Adam Sieminski, chief energy economist for Deutsche Bank in Washington, DC, said, “We would be more convinced of the sustainability of the oil price rally if it were accompanied by an elimination in contango in the crude oil forward curve and improvements in fundamentals.”
‘Liquidity not needed’
QE2 “comes at a time when markets are not asking for additional liquidity and when US assets seem relatively well priced,” said Olivier Jakob at Petromatrix, Zug, Switzerland.
“The Fed wants to promote employment but as an employer we would want to know what happens when the current program ends. As a passive investor that understands that the Fed wants to promote the S&P Index back to the 2007 highs, we would want to know what happens to the stock market once the Fed stops buying it” Data shows “after a 2-week slowdown the equity mutual funds are suffering again from outflows,” he said.
The liquidity injection not wanted by US markets “will have to go somewhere else and the next steps to watch are therefore the intervention of the Bank of Japan and capital controls from emerging countries,” Jakob said.
Launched in early 2009, QE1 “did not create any core inflation because the money stayed in cash at the banks rather than thrown back into the economy, and it will be interesting to follow the evolution of cash held by banks in the weeks to come to see if QE2 is not a troubled asset relief program (TARP) in disguise,” Jakob said.
“When QE1 was launched, oil prices were at $40/bbl. Oil prices have doubled since then, and then the economy started to stall and the expected job creation never came. QE2 is launched with oil prices at $85/bbl, and if the new Fed liquidity is pushed into oil futures then the impact on the economy will be quick but not positive as we are starting QE2 with oil prices at too high of a base,” he said. “Bernanke stated that he is not worried about higher commodity prices translating into high inflation; that might be true for the measurement of core inflation by the Fed, but it does translate into lower disposable income and especially so for emerging countries.”
Jakob said, “The Fed delivered about what was expected and in the end will add in $75 billion of fresh printed bills to the $35 billion of reinvestments from its mortgage-backed securities. Altogether we are moving from the $20-30 billion of permanent open market operations (POMOs) that were restarted in mid-August to $110 billion of POMOs by month until the end of June. This will be about two times more by month than what the Fed was doing in the second quarter of 2009.”
(Online Nov. 8, 2010; author’s e-mail: email@example.com)