The oil market got heavy as word of a possible story of a Fed exit, which started to permeate the trading floor on Friday. And sure enough the Wall Street Journal soon published an article by Jon Hilsenrath that said "Federal Reserve officials have mapped out a strategy for winding down an unprecedented $85 billion-a-month bond-buying program meant to spur the economy—an effort to preserve flexibility and manage highly unpredictable market expectations. Officials say they plan to reduce the amount of bonds they buy in careful and potentially halting steps, varying their purchases as their confidence about the job market and inflation evolves. The timing on when to start is still being debated. "
Of course for oil that can have major implications. I wrote the day after QE1 that you can't fight the Fed, and that the Fed just printed a floor under commodities. I went as far as writing a song back in 2009 — "I fought the Fed and the Fed won.” What is that they say about never fighting the Fed? Well at the very least do not underestimate the way this Fed can change the marketplace. The Fed’s timing of this move to quantitative easing still has the market coming to grips with the shorter and longer term effects on the economy and the markets.
Of course at that time I was met with a lot resistance to this concept. In fact one news article took me to task. They blamed the speculators and thought my quantitative easing argument was hog-wash. Yet of course now everyone realizes the impact that QE has had on the price of commodities and the prospects of oil. In fact even those that at the time denied the impact now have to admit the power that the Federal Reserve has. The Fed with its power to flood the market with money to try to avoid deflation has changed the value and how we perceive the price of oil.
Economic data now has to be taken in the context of how it might impact Fed policy and that is why it is so important to read the Fed tea leaves. At the same time you have to look at the impact of supply and demand as well. News that OPEC raised production was another negative factor in the market. The huge sell-off in the market was met with a rebound as traders felt that perhaps they priced in too much bearishness too soon.
The other issue is oil going down to the Gulf Coast and whether our production boom will overwhelm the refineries. Robert Campbell writes "A recurrent assumption made by many oil analysts when trying to figure out the courses of the U.S. shale oil revolution has been that the rising torrent of crude will eventually flood the market along the Gulf Coast.” Yet so far this has not happened. Cash crudes on the Gulf Coast have lost some ground against global oil benchmarks over the last four months but are hardly in crisis territory. What has happened is that high-cost imported crudes are being squeezed out of the U.S. market. Those barrels still finding homes in key markets are largely characterized by being exceptionally heavy grades of crude or oil from the Middle East that is being competitively priced to ensure producers from that region hold on to market share.