The oil market rejected breaking down to lower levels as the Fed worries about inflation and the market worries about threats to supply! Labor strikes in Libya at one point reduced oil exports by 70% causing a rebound in oil products as Europe may look to the United States to up product exports. You could see that quit clearly in RBOB the weak sister of the complex. Overall the Energy Information Administration was bearish but not as bearish as the American Petroleum Institute version and a drawdown in Cushing lending some support. Still it was the Fed that cemented a floor and gave confidence to the buyers. Now we look to Europe to see if its central banks have the same sway.
U.S. economic data was strong. GDP and the ADP jobs numbers blew away expectations. That raised fears that the Fed would taper, killing the energy demand that those numbers in a normal world might suggest. Yet oil seemed to focus more on supply threats at that point as Libya labor strike cut into supply. Bloomberg Reported "Libya, holder of Africa's biggest crude reserves, has closed all oil terminals except Zawiya amid labor protests, according to Oil Minister Abdulbari Al-Arusi. Zawiya, capable of handling 300,000 barrels a day, is operating, while the largest port, Es Sider, and others including Ras Lanuf, Marsa Brega and Hrega are shut, the minister said at a press briefing in Tripoli. The closures will reduce exports by some 1.1 million barrels a day from yesterday's level of 1.425 million a day, he said." AFP reported that Libyan oil exports plunged by more than 70% after protesters forced the closure of shipping terminals, Prime Minister Ali Zeidan said on Wednesday." "Groups closed the ports of Ras Lanouf, Zueitina, Al-Sedra and Al-Hariga, forcing a drop in production to less than 30 percent" of normal levels, Zeidan told a press conference in the capital. Oil Minister Abdelbari al-Aroussi said "Libya is exporting today only 330,000 barrels compared with the average of 1.42 million barrels a day." He said the port at Zawiya is the only one still functioning.
Then the Fed took center stage. It seems that the Fed is disturbed by the fact that we are not seeing any inflation pressure. The Fed said in its statement that the Committee recognizes that inflation persistently below its 2% objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term. Yet what if it does not? You see now it may take more than upbeat economic data to inspire the great taper. It may take inflation. The Fed seems worried that despite its best efforts to buy mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month that it is not stirring any inflation. Perhaps that is the clearest sign that there are still major problems with the economy and the only thing that is keeping us from a deflationary tail dive is Fed bond buying. Without any inflation pressure and a still too high employment rate why would the Fed even think about tapering? There would be no reason to. In fact based upon their inflation fears, instead of tapering perhaps they should be ramping up bond purchases to shock the economy out of its dis-inflationary haze.
Yet there are signs that at the very least commodity price inflation is coming back, Commodities in the month of July has their best month this year. Oil is getting more support from better than expected manufacturing data from China and Europe. That comes as EU and central bankers start to look into where they should release the minutes from their meetings like the Fed to provide more transparency.