Oil market finds comfort in Bernanke’s promise

Leadership you can believe in

When the market looked for leadership the world over, it appears that leader was found in Ben Bernanke and his friends at the Federal Reserve. Well you can say what you want about whether or not he should have printed more money like many in the marketplace may have wanted, but perhaps what he brought to the market was something more valuable than printed money. He brought leadership and clarity. In a business climate that has been held back by uncertainty and the threat of higher taxes and government controlled higher health care costs, at the end of the day it appears to me there's one man business can count on and that is Ben Bernanke. You see in the historic first Fed meeting in a world awash in panic and turmoil, Ben Bernanke took responsibility, admitted the slowing down yet at the same time, assured us not to panic. Bernanke wanted to assure small business that he has your back. While we don't know what health care costs are and we don't know what senseless regulations may face us, at least we will know what interest rates will be. Instead of a vague extended period language that was only meant to be at least 3 months, Ben Bernanke has pledged to business that interest rates will be low until mid-2013. While the market did show some disappointment initially that the fed refused to print more money, after thinking about it the market seemed to think that perhaps when it comes to U.S. policy, perhaps Mr. Bernanke is the only sane one in the room.

Bernanke did not make excuses. He said that he and the Fed were wrong about economic growth. He did not blame the Republicans or the Democrats or the Tea Party but said that they were wrong. He and the Fed said that economic growth so far this year has been considerably slower than the committee had expected and that indicators suggest a deterioration in overall labor market and that the unemployment rate has moved up. Household spending has flattened out and investment in nonresidential structures is still weak, and the housing sector remains depressed.

But temporary factors, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan, appear to account for only some of the recent weakness in economic activity. In other words, unlike some politicians in Washington who only say, "it's not my fault," Bernanke gave the market the sense that indeed perhaps we can work our way out of this mess.

Bernanke made a stand and despite the most opposition to a Fed leader since the 1980's, he stood up to Richard W. Fisher, Narayana Kocherlakota, and Charles J. Plosser, who would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the Federal Funds rate for an extended period. Ben Bernanke wanted to make it clear to business that they could count on low interest rates even if they couldn’t count on strong leadership from Washington. That type of leadership was responsible for one of the biggest market rebounds in recent memory.

Yet despite the rebound, the market is still nervous realizes that the Fed can't do it all on their own. The outlook is still very nervous and that is being reflected in the market swings. Oil prices big drop to the $75.00 area and rebound back above $80.00 should mean that we set a near-term floor. Still it will be the longer-term demand outlook that will really give the market direction. The most optimistic forecast on demand (and I say that with a little grin) comes from the agency of consuming nations the international energy agency. The IEA lowered its 2011 global demand outlook to 1.2 million barrels per day. They still warned about a supply deficit though if demand does better than expected. The IEA upped its 2012 demand outlook by 0.1 million barrel per day due to oil-fired power needs in Japan. The IEA says that global oil demand this year will be 89.5 million barrels per day which is up 1.2 million barrels per year-over-year, and for 2012 demand will average 91.1 million barrels day, up 1.6 million barrels day year-over year. If we see a lower GDP case would cut 0.3 million barrels per day and 1.3 from 2011 and 2012 demand.

Iran on the other hand is warning that because of the weakened demand outlook there may have to be an emergency OPEC meeting. It is rather funny that Iran that made such a fuss at the last OPEC meeting, will now look to Saudi Arabia to cut production to save their economy. If I was the Saudis I would want to bury them. Don't look for the Saudis to rush into lowering production.

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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