Oil eases back as calm grows in Egypt

February 6, 2011 06:00 PM

An Uneasy Calm

An uneasy calm seems to have covered Egypt, yet the market knows that this story may not be over yet. Oil prices fell as Egypt did not continue to descend into chaos and the employment number was a disappointing jumbled mess. The government reported that nonfarm payrolls went up a pathetic 36,000 yet at the same time the unemployment rate fell to 9%, from 9.4%. Some claim the weather hurt the numbers, and they probably did, yet the combination of jobs uncertainty and a growing calm in Egypt caused oil to ease.

Yet after breaking hard, the market is creeping back as it appears that Egypt is not and may never be back to normal. Opposition leaders, despite meetings with the vice president, promise more protests even as Egypt tries to get on with the daily grind of life. As the Department of Energy reminds us "Egypt is a significant oil producer and a rapidly growing natural gas producer. The Suez Canal and Sumed Pipeline are strategic routes for Persian Gulf oil shipments, making Egypt an important transit corridor for world energy markets."

Oil prices are riding this Egyptian roller costar and it is not sure if this ride ends in Egypt or continues to Libya, Algeria, Jordon or Saudi Arabia. And if that wasn't enough to worry about, Iran, no stranger to using murder and intimidation to put down dissent, now is promising to launch satellites into space. The AFP reports that Iran plans to launch several home-built satellites by March 2012. No word on how many will be Photoshopped.

The other big debate is inflation! Is the market signaling that it is worried about inflation or not? The Wall Street Journal says that they are. They say "The U.S. bond market has begun sending a message that inflation risks are rising and the Federal Reserve may be too slow to act, potentially marking a significant turning point in the economic recovery. In the past week, Treasury-bond yields have jumped to their highest levels since last spring. Yields on 10-year Treasuries surpassed 3.5% and 30-year yields broke through 4.7%, which makes some worry could mean rates will march even higher. Long-term rates have been gradually moving higher in response to an improving economy and rising commodity prices.

“But in recent days the increases in yields accelerated, a move many say is due to the worry that the Federal Reserve may be underestimating inflationary pressures in the economy, and may act too slowly to tame them. Inflation is bad for bondholders, eroding the value of their fixed returns and sending the prices of their bonds lower. While raising alarm bells about inflation, the bond market is also indicating it sees no signs that the Fed will intervene. Short-term rates, which are most sensitive to Fed moves, have held relatively steady, causing the difference between two-year and 10-year notes to reach its steepest level since February 2010. Such a steep ‘yield curve’ is typically a bullish sign for the economy and the stock market. It could also, however, suggest that investors see a risk of overheating. Even if they don't consider themselves bond-market ‘vigilantes’ – the term for investors who try to change government policies by driving interest rates higher – the effect of their actions may still be the same. Though most market watchers express faith that the Fed can still get ahead of the inflation pressures, the doubters are exacerbating a bond-market selloff."

Yet Bloomberg New Reports "Investors are betting with Ben S. Bernanke that surging food and energy prices won't accelerate U.S. inflation, allowing him to maintain easy money. Their forecast shows in gauges of long-term price expectations, including the difference between 10-year nominal and inflation-indexed Treasury bonds, which fell to 2.36 percentage points Feb. 4 from 2.41 points Jan. 5. While pressure from commodity costs may cause a spike this year to what Pacific Investment Management Co.'s Anthony Crescenzi considers a warning threshold of 2.75 points, the spread won't persist there or higher without strong job growth, Crescenzi said. That means the Federal Reserve chairman probably won't raise benchmark interest rates from near zero in 2011 because of higher consumer prices, Crescenzi predicted. So investors may want to purchase two-year Treasury notes, which yielded 0.74 percent on Feb. 4 compared with 0.54 percent Jan. 28, or buy Eurodollar contracts that expire within the year, he said. ‘Headline inflation is beginning to have a greater influence on monetary policy, but not yet at the Fed,’ said Crescenzi, who helps manage $1.2 trillion at Pimco in Newport Beach, California, as executive vice president. The central bank ‘remains anchored or hinged to the core rate,’ which excludes food and energy costs. The Fed ‘appears to be awaiting economic growth that is stronger than 3.5 percent, a more significant decline in unemployment and rising expectations for inflation,’ Bob Doll, chief equity strategist for fundamental equities in New York at BlackRock Inc., said in a Jan. 31 note. ‘In our opinion, we are still quite a bit away from such an environment.’”

Well we know who is worried about inflation at least on a global scale. The Wall Street Journal reports "Emerging market economies need to curb growth to prevent overheating and help calm food and energy price inflation that threatens to undermine the global recovery, the International Monetary Fund's No. 2 official said. Surging demand from countries such as China, India and Brazil and supply constraints are fueling inflation and risk overheating economies in developing nations. This trend could stymie a weak recovery in advanced countries and add political pressure on fragile nations in the Middle East and Africa. ‘Pretty much everybody's going to need to tighten monetary policy, reduce budgetary stimulus and continue with the process of structural reforms,’ IMF's First Deputy Managing Director John Lipsky said in an interview with Dow Jones Newswires. ‘Exchange rate policies can be part of supporting that process.’”

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 is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil 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.