Wednesday, October 26, 2011

Today's Major Market Move: WTI Crude Futures Up 14% this Month

Today's Major Market Move post features WTI crude futures but I'm going to start out by talking about the debt crisis in Europe. Today equity markets around the world have been rejoicing at the news that more bailout measures will be put in place for struggling banks and governments in Europe. The lower house of the German parliament authorized a blank check for the EFSF to leverage itself without restrictions and the ECB announced that they would continue their program of purchasing government bonds. These latest steps are just further confirmation that when confronted with a financial crisis, governments and central banks around the world will continue doing the same thing they've been doing for the last 4 years in order to avoid immediate financial pain. In the case of governments that means spending or putting a risk more taxpayer money. In the case of central banks, it means pushing out more 'liquidity' into the system by any means possible, whether it be QE vX, purchasing MBS, purchasing sovereign debt or Operation Twist.

So this brings us back to oil, the commodity upon which the global economy depends more than any other. Its many uses include, but are not limited to, fuel for transportation, energy generation, heating, fertilizer, plastics, asphalt and pharmaceuticals. It is now becoming more and more apparent that the only dampener on government and central bank intervention is the price of oil. Back in mid 2008 as the financial crisis was starting to get rolling and WTI crude prices were over $100 / barrel (on their way to over $140/ barrel), the Fed had enough concern about rising oil prices that they were threatening to raise rates later in the year. The ECB went beyond just threatening and actually increased rates in the midst of a deflationary credit collapse. From the Washington Post back in June of 2008:
But six days later, addressing a conference sponsored by the Federal Reserve Bank of Boston, Bernanke took a firmer position in reaction to the soaring price of oil. By promising that the Fed would "strongly resist" inflationary expectations, he generated talk of a rate increase -- probably later this year.

Bernanke's strong language came four days after Trichet's surprise announcement that the European Central Bank's governing council, meeting in Frankfurt, had agreed on a rate increase after heated debate. That constituted a major internal victory for anti-inflation hawks in Europe led by Axel Weber, president of the German Bundesbank.
Now we return back to today and see that oil prices have made a strong move lately, up almost 14% for the month of October. If equities continue their strong run and the perception remains that the European problems have been fixed or at least alleviated, don't be surprised to see $100 or higher WTI crude prices in the near future.

Click here to go to an active version of the chart.

No comments:

Post a Comment