For most of the past year, US Federal Reserve talk was all the rage. Will they, or won’t they, taper their $85 billion per month bond buying program and if so, when? Well, the board finally did the deed and now experts are trying to gauge the impact on oil futures.
The immediate effect on December 18, the day the Fed said it would scale back its stimulus program since the economy has shown steady growth, was slight. NYMEX front-month futures settled 58 cents higher at $97.80/barrel, just below the session high of $98.01/b. Crude gradually climbed to settle at $100.32/b December 27, but has since fallen back to settle at $95.62/b January 2.
But front-month NYMEX crude futures were already on the decline after reaching $112.24/b on August 28–a two-year high for the commodity as the possibility of military action against the Syrian government and ongoing concerns over Libyan oil supply supported prices during the summer. The US-led military action against Syria didn’t happen, while Libyan production has slowly been returning.
Some analysts have been arguing that the Fed’s quantitative easing program has artificially inflated commodity prices. If this were true, it would stand to reason that the Fed’s tapering would be bearish for oil futures.
But Barclays Capital analysts said in a recent research note it had become “an article of faith” among some economists that quantitative easing would inflate prices.
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On the face of it, analysts contend that commodities appear to have pushed higher from quantitative easing nearly as much as other asset classes like equities, which Fed policy was explicitly targeted to support.
But six key commodities markets have seen price gains that are greater than the 120% increase in the S&P500 since quantitative easing commenced in December 2008: palladium, US gasoline, Comex Copper, Brent crude, LME copper and WTI crude. The only one major commodity market where prices are trading lower than when the first round of quantitative easing was introduced, the analysts said, is US natural gas, which has undergone a technological revolution.
“But anyone expecting a sharp move lower in prices across a wide range of different commodities as the Fed gradually reduces its bond buying through 2014, is in for a fruitless wait, in our view,” they said.
While gold and silver are “clearly vulnerable,” the analysts said they are the exceptions.
“The prices of most industrial commodities tend to strengthen as the cycle unfolds. If the start of tapering shows that the Fed is getting more positive on the growth outlook (and if it turns out to be correct!), then the prospects for commodity demand are almost certainly improving too,” the report said.
Although strong recent US economic data are positive for market sentiment, Barclays analysts said the effect is unlikely to give significant upside to US oil demand growth. Instead, growth will come from emerging markets.
“Our emerging market economists expect a high degree of differentiation among EM economies over 2014, which we see as a theme in oil demand growth as well,” the analysts said. “Of the 1.27 million b/d in non-OECD demand growth we expect next year, the distribution is almost evenly split across the Latin America, Africa and Asia regions.”
Chinese oil demand growth, the analysts said, is not expected to be the sole sizeable growth focus for the markets, with the Middle East expected to grow by 240,000 b/d, Asia Pacific ex-China by 350,000 b/d and Africa by 150,000 b/d.
“We maintain our view that US oil demand will decline marginally [in 2014] by 20,000 b/d,” they said, noting that increased vehicle efficiencies should continue to offset vehicle miles traveled.
The 2014 Annual Energy Outlook released by the US Energy Information Administration recently suggests that annual increases in vehicle miles traveled for light-duty vehicles (LDVs) in its reference case averaged 0.9% from 2012 to 2040, compared with the 1.2% per year in its previous publication.
“Despite this moderate increase in miles traveled, the rising fuel economy of LDVs during the period results in consumption declining in the reference case scenario from 16 quadrillion Btu in 2012 to 12.1 quadrillion Btu in 2040 (compared with the 13 quadrillion Btu previously expected),” the Barclays analysts said.
“Along with the increase in vehicle efficiency, other structural factors in the US oil market will offset gains from the improvement in cyclical business activity,” the analysts said.