US crude oil prices have been moving up for nearly two months now. There are a number of reasons behind this strength in crude, including ongoing Mideast unrest, expectations of higher demand from China, and of course the QE-driven “risk-on” trade.
MarketWatch: – Those include improving economic data, rising Mideast tensions, changing U.S. oil market fundamentals — with greater oil-export capacity out of Cushing, Okla., and the closure of a New Jersey refinery — and an increasing number of speculative hedge-fund net “long” market positions, or bets that oil prices will rise, he said.
|March-2013 WTI contract (source: barchart)|
But two recent developments make this rally particularly unusual.
1. US crude oil market is very well supplied. Inventories are materially above their the 5-year range.
2. While some economists are talking about improved GDP growth in the US, the data so far is showing something quite different.
Near-term growth expectations in the US remain modest, particularly given the expiry of the payroll tax cut. Normally, slow economic growth and record supplies should limit a rally in energy prices. But these are not normal times and two other economic factors have taken center stage.
1. US monetary base hit a record last week as the Fed’s asset purchase program goes into full swing. This is contributing to the “risk-on” trade.
2. And the US dollar has weakened in response, creating a positive backdrop for commodities.
|US Dollar Index (DXY) (source: MarketWatch)|
Yes, Mideast tensions and expectations of higher demand from Asia certainly contribute to this rise in oil prices. But absent major international supply disruptions, it will be the US monetary expansion and dollar weakness that will push crude higher – in spite of relatively weak economic fundamentals and a well supplied marketplace.
From our sponsor:
Wall Street Examiner Disclaimer: The Wall Street Examiner reposts third party content with the permission of the publisher. I curate these posts on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. No promotional consideration has been offered or accepted. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler and no endorsement of the content so provided is either expressed or implied by our posting the content. Some of the content includes the original publisher's promotional messages. The Wall Street Examiner is not familiar with the services offered and makes no endorsement or recommendation regarding them. Do your own due diligence when considering the offerings of third party providers.