Oil and commodities are rising with renewed talk of buying
bonds in Europe and future stimulus from the Federal Reserve in the United
States. The problem of course is that higher oil prices partially offsets some
of the benefits of these Monetary Initiatives by leaders (It is debatable how
effective these policies actually are in solving the real issues and problems).
The way European economies are set up with regard to slow
growth, mature countries with little innovation, high taxes, and even higher
government spending commitments means the numbers just don`t add up. Europe
could start from scratch with all debt forgiven and they would be right back
where they are now in less than 10 years because the numbers just don`t add up.
Until the numbers start to make sense all these monetary initiatives are just
temporary stop gaps which actually make the numbers problem worse.
But since everything seems to be managed these days, and all
markets are correlated globally with electronic trading and sophisticated
trading algos, central governments might as well be in charge of the actual
commodities they are juicing. Because in effect their policies are managing
these commodities prices, from corn to gold, from gasoline futures to silver
prices as it is all the same trade in the market`s perspective.
So why not let these central governments manage the outright
commodities just like OPEC? ECB starts bond buying program, dumps a bunch of
oil on the market to offset the negative side effects of their programs. The
Fed starts QE3, dumps a bunch of Oil on the market at the same time so Oil
prices don`t rise with the stock market on QE3.
Do these SPR releases work? Heck yeah, just ask all those
traders who lost money last year when WTI went from $115 a barrel to $94 in 24
hours on the rumor behind the scenes that the SPR releases were being
coordinated (this is long before the actual news when the price dropped about
$7 dollars a barrel).
By the time the SPR releases were actually announced all the big players had already priced this event into the markets. The real damage came before the actual announcement as like most things on Wall Street inside information runs rampant when so much money is involved.
Can you imagine how valuable that information was that got leaked to the big players that there was going to be a large coordinated
release of the SPR`s? Now you are not naive enough to think that the magical
$20 drop in Oil prices over that 2 day period was just natural markets at work
do you? So yes, SPR releases do in fact work!
Oil markets like most commodities are momentum based, and
besides the immediate additional supply on the market and the drop in futures
prices as longs get screwed and have to dump positions is the psychological
factor that at any time the Government can come in and “manage” the market. It
is hard to get too much momentum going under those circumstances. In effect,
sort of like OPEC manipulates….I mean “manages” prices.
Why not set a target and then trader`s will know exactly
where they can push the price of oil before getting out? Is it any different
than the Swiss targeting a level in their currency or China for that matter? If
the ECB is going to target an interest rate for Spanish Bond Yields on the
10-Year, why not set actual targets for Oil as well?
For example, target WTI at no higher than $90 or $95 a
barrel and Brent at $105 to $110, and then Central Governments wouldn`t even
actually have to release any Oil as they could just set the targets and markets
would do the work for them assuming no actual supply shortages in the market. Which
by the way has actually been the case for the last 5 years based upon
conservative analysis of the EIA data, i.e., there has been no supply shortages
despite the price fluctuations with all oil inventories well above average
supply levels during this period.
Really, since Finance ministers are in effect “Managing “
oil prices as a byproduct of their actions anyway just give them one more tool
for their policy initiatives in letting them manage the releases of the SPR`s
as well.
© EconMatters All Rights Reserved | Facebook | Twitter | Post Alert | Kindle
