Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

What the Fed Taper Means for Crude Oil Prices

Commodities / Crude Oil Dec 20, 2013 - 05:10 AM GMT

By: Money_Morning

Commodities

Dr. Kent Moors writes: Yesterday afternoon, after much gnashing of teeth, the Fed finally revealed its long awaited taper plans…

And the DOW jumped by almost 300 points.

Now, the taper itself is small to start – just a $10 billion reduction for the month of January. But the announcement was coupled with a pledge to keep the fed funds rate at zero beyond the 6.5% unemployment threshold.


As a result, two things collided in the last 90 minutes of yesterday’s trade: A clear indication that the economic recovery was strengthening and a classic “short squeeze,” which merely added fuel to the fire.

As we approach the end of the year, that means the “Santa Claus rally” may have a bit longer to run

But longer-term, the market is now faced with less artificial stimulus next year and a gradual return to a market where direct pressures influence its direction.

Here’s what that will mean for the oil prices in 2014…

A Walk into the Great Unknown

Now, there have been opinions expressed (which in large measure parallel my own) that the Fed’s stimulus has had a declining net influence on stock market performance.

Certainly, the low interest rate environment has made money more affordable (cheaper, actually), had a positive impact on the real estate sector, and provided some incentive to leverage moves in the M&A market.

Yet the genuine benefit of these has been disappearing.

The great unknown is still the effect all of this stimulus will have on forward inflationary pressures.

The bond buying programs, after all, are financed with manufactured money, not proceeds from actual market operations.

But most of the more reasoned arguments among competent analysts have centered on what successive stages of QE contribute to the building of inflationary expectations.

To date, that appears to have been negligible.

The Fed may have achieved its primary purpose of fiscal support while avoiding a longer-term erosion of overall market value. Now I admit, it is too early to say for sure, but so far, so good.

Of course, should there be a serious downturn in the recovery, a return to adding manufactured liquidity to the market is always possible. However, absent a major setback or crisis, that may be unlikely in the medium-term.

And that means, as tapering works itself out, the process will impact different market sectors in different ways.

OK, then, so what is in store for the energy sector?…

What Really Drives Oil and Gas Investments

The single most important force in energy prospects will remain the aggregate demand indicators.

This is the primary immediate driver of energy prices, especially oil and gas, in just about any market environment (save one complicated by crisis or war). I regularly comment on such developments here, developments that have little to do with Fed policy.

Of course, they do have something to say about the expectations surrounding the economic recovery. And that recovery is the main reason the tapering is happening in the first place. A reversal in one will lead to a change in the other. But demand levels are not something swayed by the taper.

In addition to the range of energy sector specific market considerations we regularly review here, the selection of energy companies will remain tempered by three considerations in a tapering environment:

(1) The company’s levels of indebtedness and cash flow;

(2) Its reliance upon credit markets to fund short-term obligations;

(3) And whether the overall scope of operations subjects revenues to foreign exchange risk.

This last point introduces one of the tradeoffs likely to occur now that the Fed will be moving out of the stimulus business. Tapering will create a rise in interest rates. With the departure of cheap credit, we are going to witness another round of dollar weakness. That will put some pressure on the bottom lines that are dependent on operations in countries where the dollar has forex problems.

And this relationship introduces what may be the biggest impact of all.

Oil is the New “Storehouse of Value”

As I have noted in earlier editions, the traditional position of gold as a basic barometer indicator of market health is being replaced by crude oil.

In this case, I’m referring to the way in which futures contract pricing for oil provides a better gauge of market value as gold loses its “luster” as a contrarian play. Until the last six months or so, investors tended to buy gold as a hedge against declining market performance. As the market weakened, gold would usually strengthen.

Well that certainly has not been happening of late and is not going to return anytime soon. Gold had served as a bridge mechanism between market performance and the value of the dollar. That position is now being taken over by crude prices.

As a result, it is oil prices that will benefit most from the departure of cheaper money as interest rates rise in a post-stimulus environment.

Now, the tapering will be gradual, and is always subject to a reintroduction if the economy falters. The rate of tapering is certainly going to influence how quickly bond yields rise and what the resulting interest levels will be.

This is the important point. As interest rates rise, so will the attractiveness of oil futures contracts – or “paper barrels” – as a surrogate barometer and, thereby, an attractive investment quite apart from the genuine value of the underlying “wet barrels” available for actual delivery.

Tapering is not single handedly going to spike oil prices. But I can tell you it will add a proportional “enticement” to oil prices.

Keep your eye on this. As it kicks in, Iwill be providing ways to move on it with selected opportunities across the energy sector.

PS. There’s good reason to be concerned about the Fed and the dollar.   However, I’ve found a new way to make money. It has nothing to do with stocks, bonds, or even options- but it can hand you as much as 20 times your investment. Go here to learn more.   

Source :http://oilandenergyinvestor.com/2013/12/fed-taper-means-oil-prices/

Money Morning/The Money Map Report

©2013 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules