Is Ben Bernanke losing his influence over the Energy Market? Oh sure bleak Ben told the market yesterday that interest rates would stay low for infinity and that the economy was not ready for the training wheels to come off, but his words seemed to lack the wallop that they had in the past.
We got a break in the dollar and the stock market and oil dutifully rallied yet at the end of the day it does not seem to be a market game changer like Ben has given us in the past. Perhaps the reason was due in part to the market realizing that despite the promise of low interest rates until it actually happens, Ben's words will have less impact on the value of oil because they will have less impact on the value of the dollar.
Over the past year it is obvious that Fed monetary policy of negative interest rates has been the major factor in the rebound in oil. That was in part because the dollar got smashed and some believe magically that the euro is a better currency. Yet does anyone believe that now? On one TV screen you have Ben saying that low interest rates are here to stay and on the other screen we hear about Greek strikers protesting financial reforms. When you look at that and no matter what you think, if the Fed really does raise interest rates, will it make the dollar look worse against the Euro?
We have been living in a world of negative interest rates since last March and to be honest with you the dollar has priced in that scenario to death, yet now that scenario is changing. Low interest rate promises by the Fed are no longer an excuse to trash the dollar and prop up the euro or even the yen for that matter.
Yes, the dollar may see some ups and downs yet based on the problems in the rest of the world, but it appear that the dollar, even with low interest rates and record budget deficits, is still undervalued against other global currencies. The dollar took the brunt of the credit crisis and secretly Ben embraced that. The weak dollar set the stage for the carry trade and helped bail out global banks. Yet now despite Ben's pronouncement and commitment to low rates, the market is showing that rates cannot stay low forever. We see record and near record spreads in the yield curve sending a signal that the market won’t stand for this forever and Ben wants to temper expectations so he can keep the carry trade money machine chugging a little longer. But with the increase in the discount rate, we all know that we are getting closer to an exit every day so oil bulls cannot count on the Fed and this Ben Bernanke inspired rally to go on forever.
Oil bulls also bought because we are getting a winter storm in the Northeast and others say because we saw an increase in gas demand. But won’t one offset the other? The Energy Information Agency reported a surge in refinery runs to an unimpressive level of 81.2%. The EIA reported that crude inventories increased by 3.0 million barrels, gasoline inventories decreased by 0.9 million barrels and distillate fuel inventories decreased by 0.6 million barrels.
Long term we are still bearish on oil.
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at pflynn@pfgbest.com.
