Crude oil, the new inflation/deflation gauge

Oil and the Fed

The Fed did not inspire the oil market even if they laid the groundwork for more quantitative easing in the future. With a glut of supply in the front end and the expiration of the October contract, the Feds less than glowing deflationary description of the economy was not enough to keep the oil bulls optimistic.

When the Fed said that it prepared to provide additional accommodation (or printed money as I like to say) to support the economic recovery and fight off what they perceive as a deflationary threat, oil struggled to find its footing even as the financial and metal world responded. Gold dutifully rallied to all time high, oil prices continued to crumble and the reason was clear. When the Fed tells us that household spending, while rising, is being constrained by high unemployment or that housing stats are at a distressed level, it is hard to get too excited about energy demand at a time of near record high supply. The question is not whether the Fed statement was bullish for oil because it was, but the question really is how far oil would have fallen if it were not for the Fed pointing to more quantitative easing.

You see the price of oil can't fall too hard because of its impact on overall inflation or deflation expectations and it can't rally too high because we are in the weakest time of the year. With the October contract expiring into a near record amount of oil; it needed quantitative easing now not some undefined promise of printed money in the future. Still remember after quantitative easing the original as opposed to this much anticipated sequel it took awhile for oil to realize how supportive the Fed action was. Oil had dipped to the low forties before in began its Fed policy driven journey back up to the eighties. Recently prices have been faltering in oil and traders are becoming more bearish as evidenced by the amount of puts they have been buying, leading the Fed to believe that there is a perception that prices are beginning to fall. So maybe we need to forget about gold and its inflation prediction capabilities. Its predictive powers have been tainted by outside macroeconomic static. Gold has been rallying not because of inflation fears but worldwide economic collapse fears. That means that perhaps the Fed is looking to the price of oil and the sentiment indicators as a true gauge of inflation or deflation expectations. If they are not then they should be.

As the "mood" in oil becomes more bearish, the impact on overall inflation or deflation expectations cannot be ignored. The Fed needs an oil rally at some point even if they have to devalue the dollar to do it.

Well if the Fed can't inspire oil bulls perhaps the weatherman can. Tropical storm Lisa along with another tropical wave to be named later is causing a big time rally in orange juice futures. Will the oil market get moved? OJ has been more jumpy on storms than oil. With Brazil, the world's largest producer, lowering its crop because of weak demand and the storm threat to the worlds #2(United States) and # 3 (Mexico) producer, the fear is that we could go from an oversupply to an undersupply very quickly. Yet the threat to oil seems less dire. The supply cushion has oil traders taking a more ho-hum attitude. The Fed is long term supportive to oil yet the supply and the calendar is bearish. What better time then to be playing the daily ranges?

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

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

Futures and options trading involves substantial risk of loss and may not be suitable for everyone. The information presented by The PRICE Futures Group is from sources believed to be reliable and all information reported is subject to change without notice.


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