Oil focuses on fundamentals while de-coupling from Fed

One Less Thing That The Fed Has To Worry About

Forget the Fed because the West Texas Intermediate oil market (NYMEX:CLX13) sure did. Oil is asserting its independence as it starts to become unconnected with the QE risk-on trade. This, of course, will come as relief to producers and traders who had a hard time understanding why QE messed with their supply and demand fundamentals in the first place.

Many could not understand the connection and the strong correlation with the dollar and the bond market and only wanted to count barrels out and in. They blamed speculators and high-frequency trading, yet it took many to understand that when the Fed moved to the dark side with QE, it was an oil market in crisis mode and the dollar and Fed policy were everything if not the only thing. In the early days of QE many did not understand that in an environment of total economic collapse that the only thing that we had as far as a pulse in the economy was the Fed pumping in money to the system. 

Yet that correlation is now breaking down because of booming U.S. production and the fact that we are not on a perpetual war preparation footing with Iran. Syria is on the back burner much to the dismay of Saudi Arabia who still views Syria and Iran as a threat to their very survival.

Of course the strong and sudden correlation of Fed policy to the economy became a worry to Fed officials. Non-correlated assets that were supposed to be independent suddenly started dancing to the Pied Piper of the Fed causing distress within the ranks. Could surging commodity price inflation undermine Fed policy? Soon to be Fed Chairperson Janet Yellen tried to tell us that these markets were uncorrelated but market action told us something different.

Yet while precious and industrial metals soar and bond yields plummet in this latest extension of QE, or non-tapering , fears that commodity price inflation might further derail the economic should not be as big of a concern.  A booming oil supply and sharply falling prices should get the Fed and Janet Yellen off the hook. Oil prices in the U.S. will care less about the dollar and Fed policy and will start to march to their own drummer. The breakdown in this correlation will become the talking points that everyone else will be talking about as this independence will become more apparent. Of course, you read it here first.

Yet as far as Brent crude, you may not be as lucky. Supplies are still at risk as ongoing violence in Nigeria, and threats to supply out of Libya, not to mention Saudi Arabia displeasure with the United States. Reuters reported that a source close to Saudi policy said Riyadh would make a "major shift" in dealings with the United States in protest at Washington's perceived inaction over the Syria war and its overtures to Iran. The source suggested the planned change in ties between the energy superpower and its traditional U.S. ally would have wide-ranging consequences, including on arms purchases and oil sales.

As I told Market Watch and The Fox Business Network  “The Saudis are showing their displeasure with the U.S. for not attacking Syria.” The Saudis say they will make a major shift away from the U.S. in dealings because of perceived inaction by the Obama administration. Of course The U.S. is going to be less dependent on the Saudis so they may be killing two birds with one stone by chumming up to their new best customer China. Of course, I don’t remember China talking about bombing Syria?

Bloomberg reported Nigeria’s Movement for the Emancipation of the Niger Delta said it is responsible for a fire today at the state-owned Warri oil refinery.  A blaze at the 125,000 barrel a day plant was brought under control by fire-fighters, according to Vitalis Chidozie, a local resident.  Those problems will keep Brent at a premium but that is not the Feds problem.

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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