Oil Price Down Despite Monetary Easing

Despite the third round of quantitative easing announced by the US Federal Reserve, and the Bank of Japan’s response with its own fresh package of stimulus measures, oil price did not act the way analysts and traders had expected. The oil market is running counter to signs in other markets of a pick-up in expected inflation.

Although markets quickly reacted to the Fed QE3 announcement, just a few days later, on September 17, Brent crude oil went down almost $4 a barrel in just four minutes. Over the next two days, oil lost another $5.60, with the oil market ending the week sharply lower, despite a partial rebound.
As a rule, inflation which is one of the monetary stimulus consequences should boost the price of finite materials such as oil. The FT quotes Francisco Blanch, head of global commodities and derivatives research at Bank of America Merrill Lynch, who notes that oil is one of the commodities most impacted by quantitative easing. The bank predicts that QE3 will drive crude oil 14 percent up by 2013, with growth in the supply of money surpassing that of oil.

!m[](/uploads/story/447/thumbs/pic1_inline.png)In addition, the Fed was not the only central bank implementing monetary stimulus. At the beginning of September, the European Central Bank (ECB) announced its revamped bond-buying programme, whereas the Bank of Japan also decided to enhance its monetary easing to stimulate growth and counter deflation. Yet, despite the observed “monetary stimulus trend”, the logical rise in oil price has not followed.

While inflation in itself is a prerequisite for a surge in commodity prices, it is not the only factor with an impact on commodities. Physical supply, usage and storage costs can also determine the price of commodities. The FT quotes Craig Pirrong, a finance professor and commodity markets expert at the University of Houston, who pointed out that if all else was equal, QE should be bullish for commodities. “The problem is that very little is equal. There’s a lot of other stuff going on in the world that makes it difficult to pick the impact of QE alone.”

As reported by Bloomberg on September 24, the most recent downward movement in the oil market is attributed to the renewed discord among European leaders over the measures needed to resolve the Eurozone debt crisis, which outweighed concerns that tensions in the Middle East may disrupt crude oil supplies.
The FT also quotes Ric Deverell, head of commodities research at Credit Suisse (NYSE:CS), who noted that the previous rounds of quantitative easing suggested that while such stimulus measures might have given risk assets a boost, “the sustainability of the rebound has been contingent on whether it is followed by a rebound in economic growth.”

Bloomberg reports that hedge funds cut bullish commodity bets for the first time in September, with weaker manufacturing data outweighing central banks’ efforts to boost growth. “China over the last few years has artificially torqued their economy, which has created demand for industrial commodities and energy. The world is starting to see sobering signs of a hangover from those actions,” pointed out Chad Morganlander, fund manager at Stifel Nicolaus & Co., as quoted by Bloomberg.

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