The Oil Markets QE Premium Is Coming Out Of Price

The Fed Giveth & Taketh with Policy

The Fed may pat themselves on the back for creating the ‘wealth effect’ in stocks, and hope like heck that some of this wealth trickled down and through the rest of the economy, but it is quite evident what the Fed giveth on one hand they taketh away on the other hand in terms of higher oil and commodities prices like gasoline prices. 

EIA Fundamental Analysis

Remember last year when the EIA`s average price for the year was supposed to be by the fundamentals at around $93 a barrel, and oil basically stayed most of the year above $100 a barrel, and gasoline prices stayed elevated way beyond the fundamentals of weak demand and robust supplies. Well consumers have the Federal Reserve to thank for this market outcome as it is obvious looking now as QE is winding down so is the price of oil, as the QE premium comes out of the market, prices are going back to where they started before the injection of $85 Billion of asset purchases that ended up injecting $20 a barrel premium in the price of oil, and the resultant carry over higher prices in gasoline for consumers.

 

The Oil Market Acted Strange after Fed $85 Billion Monthly Asset Purchases

Right before QE oil was trading in the $82-87 range and pegged pretty sleepily at $85 a barrel, then QE starts and boom, the oil markets head to $100 and basically will not go down for the entire year confounding the EIA and many other analysts. And don`t go to the more supplies card or more geo-political concerns as all in all Libya is probably producing just as poorly right now as they were last year, and US supplies on the whole are in the same ballpark in terms of robust production – if anything the increase in US Production of last year compared to the prior year was more dramatic and should have been a headwind for price last year. Welcome to the Fed Effect on Oil Prices, that $85 Billion of stimulus goes into a lot of places the Federal Reserve doesn`t realize, and oil and gasoline markets get juiced a hefty margin beyond the fundamentals of the market.