Thursday, June 23, 2011

Today's M^3 - Brent Crude Futures Down Over 4% for the Day

As most people have heard by now, the IEA in collaboration with the US, announced a 60 million barrel draw down of petroleum reserves. This event, along with weak economic data reported in the US, contributed to a 4% daily decline in Brent Crude Futures making it the subject of our Major Market Move feature.

Here are the details from reuters:

U.S. crude futures fell to a four-month low on Thursday as news that the consuming nations would tap reserves and more weak economic data pressured oil prices.

A release of 60 million barrels of oil from government-held strategic reserves was announced by the 28-member International Energy Agency. The IEA said it would release 2 million barrels a day (bpd), mostly crude, over an initial 30 days to offset the disruption to Libya's output.

The United States will provide half the volumes from its huge 727-million barrel crude oil reserve, about 1.5 days of U.S. consumption, with Europe supplying 30 pct and the rest from Pacific OECD nations.

It's my opinion the main motivation behind this ploy is to give the Fed more room to pursue another round of US treasury purchases aka quantitative easing. The Fed has admitted that growth is slowing and US GDP estimates have been revised down 3 consecutive times. I guarantee that the Fed would prefer to continue to provide additional stimulus but they are restraining themselves out of fear for the effect on commodity prices. Now the next round of QE most likely will come with a different name and a slightly different format. Bill Gross of PIMCO recently predicted that the next move by the Fed would be interest rate caps. How does one put a ceiling on bond rates? By buying them. QE by any other name is still QE.

(Click on the image for a larger view.
Click here for the current performance of commodity futures.)

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