A relatively quiet day took a dramatic turn mid-morning when the White House and IEA announced a joint plan to release 60 million barrels of oil from emergency reserves. Shortly thereafter, House Minority Leader Eric Cantor walked out of the debt-ceiling talks, saying the onus is now on President Obama to break the impasse.
In recent trading, the Dow was down 1.4% while oil led a broad selloff in commodities. Crude futures were recently down nearly 5% while gold was off 2% and silver by more-than 4%; agricultural commodities were also in retreat. Meanwhile, Treasury prices were surging with the yield on the benchmark 10-year note falling to 2.91%.
The market action is hinging on the dollar, which began rallying Wednesday afternoon when Fed chairman Ben Bernanke poured cold water on the idea that QE3 is coming despite the economy's sluggish performance. To a lesser degree, ongoing concerns about Greek's debt crisis are also aiding the dollar by putting downward pressure on the euro.
A combination of weak global economic data, the Greek debt and lack of political will for more U.S. stimulus — fiscal or monetary -- has put downward pressure on commodity prices in recent weeks, which raises questions about today's decision on the Strategic Petroleum Reserves.
"This is straight-jacket time: it doesn't make any sense whatsoever," says my Breakout colleague Jeff Macke.
If the White House wanted to "stick it" to the speculators, as some theorized this morning, they would have released strategic reserves last month, when crude was above $113 per barrel. The administration has made it clear it wants to clamp down on "excessive" speculation, especially in energy futures. But to do it now, when crude is already in retreat is "deeply weird [and] disquieting," Macke says. "I don't think they have the foggiest idea how to stick it to the speculators." (See: Dos Hombres: Mourning the Economy)
Furthermore, the administration must be wary of the law of unintended consequences: Since many of the same speculators betting on oil are also long stocks, any action designed to quell speculation could trigger a flight from so-called risk assets across the board. Falling gas prices might be good for U.S. consumers, but not if it's offset by further weakness in 401(k) accounts.
For true conspiracy theorists, the thinking goes like this: When the Fed downgraded its estimate of the U.S. economy and 2012 employment Wednesday, the White House went into panic mode. In order to get Bernanke's dour outlook off the front page, Obama announced the Afghan troop withdrawal followed by this morning's release of strategic petroleum reserves, which, of course, was reportedly done after close consultation with the Saudis and has the added goal of putting pressure on Iran.
While that might be too conspiratorial for some, Yahoo's economic editor Dan Gross agrees releasing strategic reserves is much more about psychology vs. sound fiscal policy. "There's paralysis at the political level, paralysis at the Fed, and in international policy making," he notes. So the Obama administration is seeking to "do something to get the public's attention" now that the 2012 campaign is under way.
Let the games begin.
- Strategic Petroleum Reserves
- Fed chairman Ben Bernanke
- House Minority Leader Eric Cantor
- law of unintended consequences
- the White House
- stick it