Well I guess we have one thing to be thankful for this Thanksgiving, oil prices are coming back down. All right it’s something and it was hard to find that silver lining especially after the week that we have had. It seems the world has gone crazy and there are new risks around every corner and these risks have conspired to bring oil prices back down. Now can you enjoy your turkey?
It was only weeks ago that oil bulls were basking in the intoxication of the Fed’s Quantitative Easing the sequel. The oil market topped $88.00 per barrel; it was a suckers rally as the market felt confident that all was well as the Fed had the markets' back. What was there to worry about?
Well after the Fed minutes we find out there is plenty to be worried about. The Fed’s grim economic outlook and a sense that perhaps some members of the Fed are questioning fed policy have helped reduce some oil trader’s optimism about QE2 inspired oil demand.
The Fed lowered its forecast for 2010 GDP down to 2.4 to 2.5% from their previous estimate of 3 to 3.5%. For 2011 they expect GDP between 3% and 3.6%, down from 3.5% to 4.2% previously. As far as 2012 when the market expects rates will finally increase GDP projection is little changed while the new 2013 projection is put at 3.5-to-4.6%. The Fed also downgraded expectations for the unemployment rate which were raised for 2011 to a rate, 8.9% to 9.1% is expected. In 2013, the jobless rate is still seen between 6.9% and 7.4%.
What’s even more of a concern is the members of the Fed may not be on board with all of the printing of money. The Fed Minutes said that participants differed in their assessments of the likely benefits and costs associated with a program of purchasing additional longer-term securities in an effort to provide additional monetary stimulus, though most saw the benefits as exceeding the costs in current circumstances. Most participants judged that a program of purchasing additional longer-term securities would put downward pressure on longer-term interest rates and boost asset prices; some observed that it could also lead to a reduction in the foreign exchange value of the dollar. Some expected these changes in financial conditions to help promote a somewhat stronger recovery in output and employment while also helping return inflation, over time, to levels consistent with the Committee's mandate. In addition, several participants argued that the stimulus provided by additional securities purchases would help protect against further disinflation and the small probability that the U.S. economy could fall into persistent deflation--an outcome that they thought would be very costly. Many, however, anticipated that additional purchases of longer-term securities would have only a limited effect on the pace of the recovery; they judged that the economy's slow growth largely reflected the effects of factors that were not likely to respond to additional monetary policy stimulus and thought that additional action would be warranted only if the outlook worsened and the odds of deflation increased materially. Many noted concerns that additional expansion of the Federal Reserve's balance sheet could put unwanted downward pressure on the dollar's value in foreign exchange markets. Several participants saw a risk that a further increase in the size of the Federal Reserve's asset portfolio, with an accompanying increase in the supply of excess reserves and in the monetary base, could cause an undesirably large increase in inflation. However, it was noted that the Committee had in place tools that would enable it to remove policy accommodation quickly if necessary to avoid an undesirable increase in inflation. For the oil market this perception the Fed may use some restraint increases the odds that the oil prices supported by a strong dollar may come back down as the dollar strengthens.
The dollar strengthened for other reasons as well. The situation in the Korean Peninsula as well as the concerns about Europe's strong comments from Angela Merkel about the future of the Euro and the thought that when you stop a leak in one of the PIIGs debt problems you will spring another.
Have a Wonderful Thanksgiving!
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 firstname.lastname@example.org.