Oil digesting implications of Fed’s “Twist”

Twisted

Oil prices are trying to rebound in the aftermath of Greek default fears and despite the fact that S&P decided to downgrade Italy. Is it possible the Fed is getting ready to do the twist? Let’s twist again like we did last summer, ok back in the sixties when the Federal Reserve, in an attempt to stimulate long term investment, would buy paper at the long end of the yield curve thereby driving down yields in the hopes that individual investors and business would start making some long term commitment with their money. Looking at the yield curve and the falling rates on the long end there seems to be a large sector of the trading population that thinks this is a done deal. Today it is the first day of the Federal Open Market Committee and it appears that instead of QE-3d, baby let's do the twist.

Of course the reason that the Fed is twisted is the fact that QE2 did not seem to have the desired effect. The fall out of rising oil and commodity prices and the fact that the money seemed to stay in bank vaults as opposed to getting into the real economy, is making it more difficult for the Fed to justify its 3D version. Now the question is, will it work and is it bullish or bearish for oil?

Well the twist is not bearish for oil but how bullish it will be remains to be seen. Quantitative Easing has an almost immediate impact on prices by devaluing the dollar and increasing demand in the emerging markets where commodities after QE seem to go on sale. The twist, it is hoped, will have a softer impact as the longer term commitment of capital will not impact demand. Unless of course the market will focus on the value of the dollar and that will be the key. The other downfall may be the fact that the yields in the short end of the curve are so low that the long end may not inspire the type of long term activity hoped for like buying homes and building factories.

Now on to stuff that we would normally be focusing on if it were not for all of the macro clouds that were hanging over the horizon. Things like the ongoing war or non-war in Libya. No, it is not quite over and Gaddafi loyalists seem to be hanging on and taking control of the city of Sirte. Bloomberg News reported that, "Fighters from the Libyan National Transitional Council said they surround the town of Bani Walid, amid a fifth day of battle for control of Sirte, the hometown of Muammar Gaddafi. Gaddafi loyalists in Bani Walid, including mercenaries, are shooting at residents who attempt to revolt, Ahmed Bani, a military spokesman for the NTC, said today at a news conference in the capital, Tripoli. He said the size of the pro-Qaddafi force in Bani Walid is unknown and that efforts to take the mountain are being hampered by the geography and the NTC’s intent to liberate it without harming civilians. The airport and castle at the southern desert town of Sabha and two villages north of Sabha have been freed, Bani said. Sirte may fall in “two or three days,” the NTC commander, Major General Suleiman Mahmoud, said in an interview near the western city of Misrata. He said he was heading to Sirte to supervise operations and possible talks for its surrender. Members of the NTC meeting in the eastern city of Benghazi are in negotiations to form a Cabinet, interim Prime Minister Mahmoud Jibril told reporters yesterday. The council is working to establish its authority in the capital and diplomatic ties abroad. The Organization of Petroleum Exporting Countries will recognize the NTC as Libya’s representative, OPEC Secretary- General Abdalla el-Badri said in Dubai today. El-Badri said he saw little damage to oil fields in the eastern and western parts of Libya as a result of more than six months of fighting, and predicted that output will soon rise to between 500,000 and 600,000 barrels a day."

Reuters News also reported, "Global energy demand will increase 53 percent between 2008 and 2035, with China and India accounting for half of the total growth, the U.S. Energy Department said. China and India will consume 31 percent of the world’s energy by 2035, up from 21 percent in 2008, according to the reference case projection in the department’s International Energy Outlook released in Washington. In 2035 Chinese energy demand will exceed that of the U.S. by 68 percent. Renewable sources will be the fastest increasing energy category over the next 25 years, according to the report prepared by the department’s Energy Information Administration. Renewable energy demand will climb 2.8 percent a year over the period and make up 15 percent of total in 2035, up from 10 percent in 2008. Crude oil prices will rise to $125 a barrel in 2035 in 2009 dollar, according to the reference case. The department projected that oil would climb to $133 a barrel by 2035 in May 2010 when it last released the energy outlook. Demand for petroleum and other liquid fuels will advance by 26.9 million barrels a day between 2008 and 2035."

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.

 

Futures and options trading involves substantial risk of loss and may not be suitable for everyone. The information presented by The PRICE Futures Group is from sources believed to be reliable and all information reported is subject to change without notice.


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