Fed liquidity boosts oil prices as fundamentals weaken

Brent Feb13.pngOil prices long ago moved away from the fundamentals, as the US Federal Reserve targeted asset price bubbles in a misguided effort to magic up consumption gains. Thus we have to focus on sentiment indicators, as in the chart above, to anticipate likely developments:

• Monthly US oil inventories hit a new record for November (the last month available)
• Weekly combined oil/product inventories were at an all-time record for a January
• Similarly vehicle miles travelled continues to decline
• US oil production continues to surge

Prices are thus still in their ‘triangle’, waiting to see what happens next, with traders busy trying to push them higher. But today’s record levels continue to have a very damaging impact on the economy and ordinary people. All those who have to drive to work and to the shops are paying the price of policy makers’ folly. And those companies that sell to the consumer are suffering slower volume as discretionary spending power is reduced.

One day, of course, the fundamentals of supply/demand will return as the key driver for the market. And the blog continues to suspect this may be a lot sooner than most people imagine. Q2 may be a very difficult period, if today’s trends continue unchanged. As the Wall Street Journal reported yesterday, US pension funds have recently withdrawn $10bn from commodity funds, and the pace of divestment is accelerating.

When markets do rediscover their true role of price discovery, $50/bbl is more likely to be seen as a possible future peak, rather than a floor.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. He also serves as a Global Expert for the World Economic Forum. The aim of this blog is to share ideas about the influences that may shape the chemical industry and the global economy over the next 12 – 18 months. It looks behind today’s headlines, to understand what may happen next in critical areas such as oil prices, China and Emerging Markets, currencies, autos, housing, economic growth and the environment. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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