After dropping $25 in a straight line from the beginning of May to the end of June, WTI crude oil has recovered some of the losses and found an uneasy price balance in the mid $80s a barrel. Kevin Craney of RJO Futures says the seemingly endless list of reasons for the price of crude to fall are being offset only by the potential for more quantitative easing from the Federal Reserve.
The catalysts behind crude's two-month plunge have been all over the front page of your morning newspaper and fall under the umbrella of a terrifying Global Slowdown. The European recession, now believed to include Germany, is getting worse by the day. Baby steps towards some centralized Eurozone bank may assuage markets on any given day, but there's little reason to believe economic strength will drive demand for crude higher in our immediate future.
Beyond Europe the economies that once served as a backstop to the world are showing glowing signs on stress. On Wednesday Brazil issued it's 8th consecutive rate cut down to 8% as the country finds itself in the unfamiliar position of trying to restart once unstoppable growth. Also this week South Korea cut rates for the first time in three years in an effort to stay ahead of the Chinese efforts to keep its soft landing from becoming a horrific crash.
Yet another negative is dollar strength. On Thursday morning the Euro (EUR/USD) dropped to a 2-year low against the greenback when it dropped under $1.22. The dollar isn't just gaining against the Euro. The US Dollar Index has run from below 74 to the mid-80s since last October. In currency terms such a move is enormous. As any Econ 101 professor will tell you, dollar strength leads to lower commodity prices. In theory.
Against all the headwinds stands the prospect of QE3. Otherwise emboldened crude oil bears have learned not to bet against Ben Bernanke's Bazooka. Additional easing would almost certainly fail to drive growth and might not even be enough to weaken the dollar in light of the printing going on in the rest of the world. Traders don't care whether or not another round of stimulus would work because they know from past experience that Bernanke can drive prices higher, if only in the short term.
Of quantitative easing, Craney says "that's the catalyst I think a lot of people are looking for at this point to move a lot of commodities, including crude to rocket higher."
Organic problems pushing crude lower and the potential for artificial measures to jam it higher. Put the two together and the result is crude oil in the low to mid $80s. Whether or not you think it will stay there is up to you.
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- quantitative easing