Sometimes it takes an event to give you a real insight into the mood and relative strength of a market. Over the weekend the oil market had one of those telling events. Oil prices are higher on news that the Trans Alaska Pipeline was shut on Saturday after a leak was discovered at Prudhoe Bay, forcing oil companies to cut production to 5% of their average 630,000 barrels per day. Reuters News says that the shutdown of one of the United States key oil arteries, which carries about 12% of the country's production, is the latest setback for the aging, 33-year old pipeline, which handles less than a third of the oil it did at its peak in the 1980s.
Reuters says that closures of the pipeline, although short, has provoked criticism of its operators, particularly major owner BP, whose reputation is already at an all-time low after the Gulf of Mexico blow-out last year, causing the largest-ever U.S. oil spill. The shutdown of the 800-mile (1,280 kilometer) line, which runs from the Prudhoe Bay oilfield to the tanker port of Valdez, has not yet affected shipments and tankers are being loaded on schedule at Valdez, meaning there is no immediate danger of restricted oil supply.
Oil produced during the shutdown will be stored at Prudhoe Bay until the pipeline reopens. Alyeska Pipeline Service Company, the operator of the pipeline which discovered the leak on Saturday morning, had no estimate of how much oil leaked, but none seems to have escaped beyond concrete encasing the pipeline at the intake pump station at Prudhoe Bay.
If the market had the mindset to go higher, this news could have sent prices soaring. Yet, because the market is toppy, the reaction is more muted. Oil has had some problems as of late maintaining its bullish momentum and now the less then explosive reaction to this event unmasks the inherent weakness in the complex.
Oh sure, you can argue that the market knows that this may not have a large impact on supply and you would be right, but in the past it did not take much of an excuse to drive markets higher. Now with a market faced with what should be rising inventory on top of ample supply seems to be a limiting factor when it comes to demand.
Did quantitative easing save jobs? Bloomberg News reports that Federal Reserve Vice Chairman Janet Yellen said that the central bank's asset purchases will add 3 million jobs to private payrolls and has prevented the country from slipping into deflation. "Inflation is currently a percentage point higher than would have been the case. In the absence of such purchases, the economy would now be close to deflation."
She dismissed concerns that inflation will flare up, saying weak labor demand will be helpful in "mitigating the risk" and the Fed can "tighten policy when needed" by increasing the interest rate it pays on excess bank reserves. She added that the Fed's moves won't hinder growth overseas and are having "only moderate effects on the foreign exchange value of the dollar," and do not appear to be triggering "significant excesses or imbalances in the United States." Well how about in China?
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.