The crude oil market has been in a tizzy with talk of a fresh round of quantitative easing possibly coming to a head on Thursday. But another variable remains in the back of traders’ minds as rumors of a possible release from the US Strategic Petroleum Reserve continues to stir.
Crude futures have been volatile but remain tucked into tight ranges. The “bad is good” scenario behind economic data has stoked optimism that the US, UK or even China will launch some level of monetary easing to quell the litany of poor economic data that has recently included China’s lowest crude imports since October 2010, a downward revision to Italian GDP, and the weak September 7 report on the US job market.
A possible third round of quantitative easing, called QE3, has been seesawing with talk of another SPR release, leaving crude futures rangebound and tense.
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The US Fed began a two-day meeting of its Federal Open Market Committee on Wednesday and by midday Thursday, the futures market, as well as the world, might know more about the Fed’s plans going forward. At the end of August in a meeting at the Jackson Hole symposium, US Fed Chairman Ben Bernanke stopped short of signaling that extra monetary easing was imminent during his much anticipated speech, but he kept the door open for action if needed.
So how will crude futures react to QE3?
Some analysts believe a knee-jerk bullish reaction to QE3 is likely for crude futures. But a move to inject more liquidity into the US economy by flooding the market with excess currency would not necessarily bring on an increase in energy demand.
Yes, QE3 could send the US dollar lower, which in turn will boost oil futures, purely based on their correlation, but what does that mean for actual demand? “For energy demand per say, QE3 will not do much of anything,” said Olivier Jakob of Petromatrix. “If QE3 revives the economy and results in major economic growth, we could see an impact, but that is unlikely.”
The reason, Jakob said, is the possibility that a rise in oil prices from a bullish reaction to a QE3 will actually hurt demand. Key levels for NYMEX crude above $100/barrel and ICE Brent above $120/b are seen as the psychological markers for demand destruction and could give the Obama Administration, during an election year, the drive it needs to make a release from SPR.
An SPR release would certainly negate some, it not all, of the potential increase in price linked to QE3, Jakob said.
“What the world needs is lower oil prices and as long as OPEC doesn’t counter a release, SPR would diminish the bullish impact from QE3,” Jakob said.
But how sustainable are either of these forces, given neither would have made direct changes to oil fundamentals?
Miswin Mahesh, commodity analyst at Barclays, contends that any moves, bullish or bearish, in reaction to QE3 or SPR would be simply sentiment-driven and are likely to only last for one to two weeks.
“The physical picture [for crude] is fairly balanced, there is no real tightness,” Mahesh said adding that despite some thoughts, some Iranian crude is still making its way into the marketplace.
He added that a lot of market participants want to add to long positions in crude but have stayed neutral because of the potential of an SPR release. The talk of SPR, if not announced sooner, is not likely to clear out of the marketplace until US elections are over
But investors are still keen to key levels that would spark an SPR release, which Mahesh said includes US gasoline, or RBOB futures over $4/gal.
And Brent is not out of the realm of an impact from an SPR release either, Mahesh said, even if it is considered to be more of a global benchmark than its US land-locked counterpart, WTI. “We would see a reaction in Brent but more sentiment driven,” Mahesh said.
But would adding more crude to the market relieve higher gasoline prices? “In the US, gasoline prices have risen not due to a lack of lack of crude but from refinery outages and lower demand,” Mahesh said. “It is a tightness in the product market because refiners are not running crude, not because there is a scarcity of it.”
The previous SPR release in June 2011 led only to a decline in crude prices for around four to five days but that was also during a time when Libyan production was still off the market. (See today’s blog posting on that release here.)
But this time around, Mahesh said there is Iran, whose barrels remain off the market. And there are further geopolitical tensions with Syrian violence possibly spreading across the Middle East and continued issues in Yemen.
Hanza Khan, analyst at Schork, said an SPR release would likely only have a short-term impact on both Brent and WTI. “Brent is more of a global benchmark,” Khan said. “An SPR release would sent WTI lower initially but as North Sea production weakens relative to norms, it would push Brent higher and possibly take WTI with it.”
But up first for the market could be some insight into QE3, which purely based on sentiment, could rally crude futures and in turn, gasoline prices. But with no immediate impact on consumption, prices could ease quickly.
Analysts said that if QE3 does happen, from a physical feedback effect, the impact is not likely to be seen in term of consumptions for some four to five months after an announcement.
“And that also depends on how QE3 will play out. The last time it was done in installments and the feedback affect wasn’t felt until the first half of this year,” Mahesh said. “We have seen a good first half in terms of consumption, and although you cannot directly link that to QE, if it had an economic impact, it is on a lag.”
Possibly something will be revealed soon. But until then crude remains a stalemate between more money and more supply.