Oil feeling pressure from QE2 and Asia

QE2 or not to QE2 that is the question.

While the Fed printing presses continue to roll, interest rate worries are seemingly dominating the direction of the oil market. While the Federal Reserve prints more money, rates continue to raise giving surprising strength to the dollar and putting downward pressure on oil. The Chinese stock market got hammered overnight after The Bank of Korea, worried about inflation, raided their base interest rate by a quarter points to 2.50%. The move means that more than likely China will not be too far behind as countries across Asia are reacting to a major onslaught of inflationary pressures.
In the mean time, the markets are focused on the problems in Europe. EU members want Ireland to take their money as they fear that Ireland’s debt problems could spread to other countries. Ireland on the other hand says that they are fine and is telling the EU that they do not need their help. Yet the EU feels that the fallout from Ireland's debt could drive up borrowing costs in other PIIG countries, especially Portugal, Italy and Spain. The EU is saying “please take the money.”

Of course all of this global intrigue is impacting the price of oil. Rate hikes in Asia will slow demand. Uncertainty in Europe will give the Dollar support and that in turn will keep pressure on oil. Also if US interest rates continue to rise despite QE2, then the Fed will have to admit failure and try another tactic to stimulate the economy. In the mean time, a strong export window for US oil products continues and should cut into our markets oversupply.

In fact, yesterdays Financial Times wrote that Europe was a bit upset that the US was sending government price supported ethanol to their country making it harder for their ethanol producers to compete. Gregory Meyers writes that "US ethanol, subsidized as a homegrown alternative to foreign oil, is being exported in record volumes. The exports stand in contrast to the goals of US biofuels policy, which seeks to reduce dependence on imported fossil fuels in part by offering tax credits to companies that blend ethanol with petrol. The rising tide of outbound shipments will be central to the debate over the blender's tax credit, which is set to expire at the end of the year.

Exporters' use of that credit is already drawing objections in Europe. Rob Vierhout of ePure, a European ethanol trade association, said: "The blender's credit was not set up with the intention to facilitate exports" and warned of legal action to halt US shipments subsidized by the credit. The exports increase demand for the corn from which most US ethanol is refined. Nearly four in 10 bushels of this year's crop will become ethanol fuel, the US agriculture department predicts. Corn futures recently reached a two-year high."
Exports from the US are becoming a major key in estimating US supply and perhaps judging the strength in global demand as well. Remember the Nigerian rebels? Well the oil market does not seem to. There was a time when even an emailed threat from MEND "The Movement for the Emancipation of the Niger Delta" would send oil prices soaring. Now that barely gives us a blip on the oil price radar. The latest from Dow Jones says that Nigeria's main rebel group in the southern Niger Delta oil producing region said Tuesday it had seized seven local oil workers during a raid on an Exxon Mobil Corp. (XOM) facility and threatened more attacks. "The Movement for the Emancipation of the Niger Delta confirms the attack on the Exxon Mobil Ibeno oil facility in Akwa Ibom state...was carried out by its fighters," the group said in a statement. "Seven local employees were abducted," it added in apparent reference to the weekend attack staged by gunmen on an offshore platform operated by U.S. oil group Exxon Mobil.

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.

 

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