Close 

Fed’s stimulus move jogs complex forces acting on oil price

Bob Tippee
Editor

A new round of asset purchases by the US Federal Reserve cloaks the price of crude oil with yet more mystery.

The Fed this month said it would buy Treasury bonds worth a total of $600 billion by the end of next year, hoping to stimulate investment and spending by increasing the money supply and lowering long-term interest rates.

The move will jog financial forces that lately have had more apparent effect than physical fundamentals on the price of crude.

Since the middle of last year, the West Texas Intermediate price has strayed little outside the $70-80/bbl range. To many observers, the trading band seems high in a market with slowly growing demand, brimming inventories, and 5-6 million b/d of idle production capacity.

But crude has been responding less to changes in those fundamentals than to the value of the dollar and equity values. Traders have been arbitraging oil against currency and treating crude as an asset class with value potential linked to recovery and an attendant boost in oil demand.

And now the Fed has taken a step that, if successful, will keep the dollar weak and strengthen the economy. Sure enough, crude prices rose above $80/bbl in anticipation of the move and to more than $87/bbl immediately afterward, although they’ve subsided since then.

Obvious questions—whether the dollar stays weak and whether the stimulus works—don’t cover the whole story.

Important fundamentals show new signs of life. Monthly forecasts of average demand for this year are increasing. The International Energy Agency sees 1 million b/d more global consumption now than it did in January, the US Energy Information Administration 480,000 b/d, and the Organization of Petroleum Exporting Countries 600,000 b/d. And industrial-country inventories, while still high, fell in September, according to the IEA.

A new question, then: Will a crude price rising on the strength of multiple physical and financial factors annul one of its own props by damping the economy?

Confident answer: Probably, but you never know.

(Online Nov. 19, 2010; author’s e-mail: bobt@ogjonline.com)


To access this Article, go to:
http://www.ogj.com/content/ogj/en/articles/2010/11/fed-s-stimulus-move.html