Releasing Oil May Not Be Enough to Stimulate the Economy – Crude Oil June 23,... |
August crude oil fell sharply on Thursday following a concerted effort by the U.S. and its allies to drive oil prices lower and stimulate the global economy. The move to release up to 60 million barrels of crude oil into the open market drove August futures prices down over $4.00 to $89.69.
The drop in August Crude Oil took out the recent bottom at $91.51, reaffirming the downtrend and testing a major 61.8% retracement level at $90.13. The technical bounce off of this Fibonacci retracement level was impressive, but not enough to reverse the market back to up. The market finished the day lower, but a little more than $2.00 off of its low.
In conjunction with Federal Reserve Chairman Bernanke’s news conference on Wednesday where he acknowledged the slow down in the U.S. economy, the move to release the oil served as stimulus for a fledgling economy. In an effort to avoid a global economic slowdown, the rest of the world’s major industrialized nations followed suit to generate pressure on energy prices and perhaps put more spending money into the hands of the consumer.
Disruptions in supply because of the escalating war in Libya seem to be the best reason for the recent run-up in crude oil prices to over $115 per barrel. This increase came at a time when the Fed was nearing the end of its quantitative easing program. Rather than risk losing any of the gains in the economy, the government felt that it had to act now to avoid sending the U.S. economy into another recession during a time when high debt and budget deficits dominate the headlines.
Was the move political as some claim, or was it an economic strategy? No one will no for certain, however, there is still some doubt as to whether the action will have any impact on the economy at all. Gas prices are likely to fall at the pump, but the change may be close to giving drivers a free $20 gas card.
The move by the U.S. and global nations is essentially the same as a central bank intervention in the Forex market. There is usually an initial reaction in the preferred direction; however, it seldom turns into a major trend. Just take a look at the Japanese Yen after a concerted effort by central banks to weaken the currency back in March.
The risk at releasing oil from a strategic reserve is that once it is used, it is gone. If all the government wanted to do was lower crude oil prices, then it could’ve drastically raised NYMEX margins on the futures exchange. This would have forced liquidation just like it did to the silver market several weeks ago.
The timing of this action also has to be questioned. Crude oil has basically fallen back to where it was in January. It probably would have served the country better to time the release of oil from the strategic reserve with the start of the attack on Libya. This would have helped to prevent the recent hit to the economy triggered by higher oil prices in the spring.
While the ability to affect oil prices is impressive, the effect is likely to be short-term. Technically, oil prices were already headed lower because of the slowing economy. The thing is, energy prices are just a small part of what ails the nation’s economy at this time. Deficit spending and a high debt level are still major problems facing the economy. While the government and the banks have acted to strip credit out of the hands of the spending public, they have at the same time slowed the economy.
Although short-term pressure is on crude oil markets at this time, professionals recognize that demand will eventually outstrip the excess supply and prices will stabilize or rally once again. If the size of the “oil intervention” was strong enough to drive prices under $75 a barrel, then the market would’ve taken it there today. All today’s action does is buy the Fed and the administration time to deal with the other issues they face. It’s time they realize that high oil prices are not the main reason for a slowing economy.
About the author: Forex Mansion Analyst - James Hyerczyk
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