Quote of the Day.
Perhaps the biggest tragedy of our lives is that freedom is possible, yet we can pass our years trapped in the same old patterns.
Oil is continuing to move lower with the spot WTI contract now trading around the lower end of the range that has been in play for about a week or so. The markets are quickly coming to the reality that QE3 in the US, more QE in the UK and Japan as well as the ECB bond buying program are not likely to result in a major growth spurt in any of the aforementioned economies. In fact the Philadelphia Federal Reserve Bank President said in a speech yesterday that the new stimulus program probably will not boost economic growth in the US. In the EU the newly proposed ECB bond buying program will likely result in eventually pushing the three year old sovereign debt issues into the background once and for all but it will not result in an economic growth spurt either. The EU economy is in the midst of a contracting economy with recession spreading around to the individual member countries.
If the markets can put the EU sovereign debt problems on the back burner they still have to worry about how deep the recession will grow in the EU. In addition if there is a growing view that QE3 will not result in economic growth (as above) the already fragile and slow growth US economy can easily recede even further and possibly move closer to a double dip recession. All of the above scenarios are once again permeating around the markets and as such most risk asset markets have been under selling pressure this week including the oil complex.
If the slow growth or contracting economic scenario becomes a reality oil demand growth is also going to slow as oil consumption is highly correlated to economic growth. With supply not an issue anyplace in the world today, any further slowing of economic growth and thus oil consumption will result in global inventories starting to move back toward the upper end of the normal inventory range. If so it could put pressure on oil prices from a fundamental perspective.
Although more participants do not expect QE to result in an economic growth spurt (myself included) the open-ended printing of money has a high probability of resulting in an increase in inflation around the world. If so an inflationary push could easily result in oil prices as well as most traditional commodities negating the impact of bearish fundamentals and thus still pushing prices higher. In addition the geopolitics of the middle east area have not gone away nor is all of the turmoil especially with Iran's nuclear program going to go away anytime soon. It will be with us for the foreseeable future and as I have been discussing in the newsletter the risk of a possible military intervention is likely to ramp up after the US election. At a minimum the market is likely to see it that way if the rhetoric between Iran and the West remains at the current elevated level. Today Iran's President gives his annual caustic speech at the UN which is likely to raise the rhetoric another notch. Yesterday President Obama spoke at the UN and said that there is a time limit on negotiations.