The Fed’s new focus on inflation or the lack thereof has changed market dynamics. Is good new now good news again? In other words is good economic news bullish or bearish? Well it may depend on the market you are looking at.
When Fed Chairman Ben Bernanke started to suggest there are some signs that the U.S. economy was recovering and that it was possible that the Fed might start to taper back on bond and mortgage purchases the market freaked. The traders were assuming the Fed was going to assure us that the party was still on! Buy bonds and don’t ask questions. Yet when he brought in the possibility of tapering we got a sense on just how dependent the economy is on the Fed. Later of course the Fed tried to convince us that tapering was not tightening but everyone deep down knows that it really is. Of course the market did seem to get the fact that the Fed would not start to taper unless the economic data supported it.
So after yesterday’s blockbuster reports on weekly jobless claims and an explosive manufacturing number you might think that oil bulls and stock bulls would cower because that the Fed might step in and start to taper and cause a surge in the dollar and bring down all of those commodities. Yet it seems that the oil market wanted to give the Fed what they say wanted. As their statement seemed to suggest, without a serious uptick in inflation the Fed is not going to start that taper thing.
Yet if inflation is the goal then a drop in gold and rising Treasury yields must be a disturbing development short term for the Fed. Rising oil prices and falling inflation could give us disinflation that could force the Fed to add to bond purchases or even rethink current economic policy completely. Does anyone have a plan B? Well, for oil it is clear that it’s mainly a focus on economic growth that is driving incredible gains and driving hedge-funds to the long side of the market. Labor turmoil in Libya and ongoing violence in Egypt and talk that Iran could have a nuclear weapon in months is feeding into the buying frenzy. This is despite the fact that us oil and gas reserves are exploding!
The Energy Information Administration, as reported by Reuters, says U.S. energy companies added the most proved crude oil reserves in 2011 since at least 1977 as they expanded the use of hydraulic fracturing and horizontal drilling techniques, and their total proved natural gas reserves shot to a record high, the Department of Energy's statistics arm said on Thursday. Proved reserves of crude oil including condensate rose 15 percent, or 3.8 billion barrels, in 2011 and natural gas reserves rose 9.8 percent, or 31.2 trillion cubic feet (tcf), the Energy Information Administration said. Crude oil and condensate reserves rose to 29 billion barrels while wet natural gas reserves rose to a record high of 348.8 tcf, it said. The natural gas reserves rise of 31.2 tcf, was lower than the 33.8 tcf added in 2010, but it was only the second year since the EIA began keeping records in 1977 that natural gas net reserves additions surpassed 30 tcf. Proved reserves are an estimate of recoverable energy resources under existing economic and operating conditions.
The increase in 2011 estimates follows a record rise in 2010 when oil and gas reserves rose by the greatest amount since the EIA began recording the data in 1977. It also shows the huge impact that hydraulic fracturing and horizontal drilling in shale rock formations has had on U.S. energy output. Proved reserves of natural gas in 2010 had hit 317.6 tcf, up nearly 12 percent compared with the 283.9 tcf recorded a year earlier, as drillers landed find after find in rich areas like the Marcellus shale in the Northeast and various plays in Texas and elsewhere. Reuters also is reporting that U.S. natural gas futures prices slid to their lowest in five months on Thursday, stirring talk that more power plants, particularly in the Southeast, might switch from coal in the coming weeks.