The Energy Report: Ain't Nothing like the Real Thing Baby!

Phil Flynn

http://www.firstenercastfinancial.co...

Jun 09, 2009

They say that imitation is the sincerest form of flattery but at the same time it might be a sign that soon the times might begin to change. People are finally starting to get what has been moving oil and are starting to get bullish. Instead of blaming speculators or saying that there is no fundamental reason for oil to be where it is, many are finally starting to understand what has been diving oil. Oil has been driven by the credit crisis. Oil has been driven by the dollar. Oil has been driven by the stimulative and inflationary effects of quantitative easing and record budget and trade deficits.

Now that view of course was not very popular when I first presented it the day after the Fed made that move yet now other analysts and media outlets have been parroting what I have been saying about the double bullish impact of the Fed’s policy of quantitative easing. That if the economy gets better oil will rise because of increasing demand but if it gets worse it doesn’t matter because the Fed will print more money thereby driving the dollar down and drying up oil.

More and more I'm hearing this view being recited by others which of course confirms that we were right all along. Yet at the same time this is a warning that we have to look to a time when these fundamentals might change. Usually by the time everyone seems to get it, it's time to start looking for signs that those fundamentals might change. And we are seeing signs that that day may indeed be getting closer.

We assumed our bullish stance when the Fed went to quantitative easing that assured the Fed was basically printing a floor under oil. I wrote at that point that the rules of the game have changed. And when it comes to Fed power there are no rules. The Fed and its unlimited power to print money can change the dollar value of a commodity or its long term trend in an instant. I said that by creating inflation and money out of thin air the Fed can change the entire commodity trend as we know it and drive away the deflation demons of that particular moment. I wrote at that time that being short commodities had become a more dangerous proposition and the Fed had put us on notice. At anytime they can run the printing press and change the fate of a commodity. They do this not because they created a global shortage of a commodity or because of sky rocketing demand. It is because the Fed has the ammunition to make it so. The Fed's policy of quantitative easing is as simulative to the economy as a good old fashioned interest rate cut. But at the same time, it has the potential to be much more inflationary.

Of course the opposite is true when the Fed reverses course. It may be premature to start taking about a day when the Fed takes the punch bowl away yet the fed fund futures are saying it may be as the yield curve is showing that the market will only accept so much printing of money. We know the Chinese will not as they are already talking about diversifying away from the dollar and some of that diversification is buying oil and storing it.

When the Fed sends a clear message to the marketplace that they are going to reverse that policy of quantitative the Feds printed floor point for oil goes away. Oil becomes at that point less of an inflation and systemic risk hedge and goes back to being a supply and demand commodity. The dynamic for oil will change because the dynamic for the dollar will change and this will be an admission that the current course we had been on has become unsustainable.

Oh sure you can argue about the long term fundamentals for oil that are bullish and they are! Especially the stunning drop in oil patch investment. Just yesterday as Bloomberg News reported, crude oil is set to “spike” without new investments and a price surge is in the making. The global energy industry is facing “severe challenges” and the world needs unconventional energy supplies to meet rising demand. Low prices have prompted explorers to delay or halt projects, a move that will cut supplies and push prices higher as the global economy recovers. Bloomberg reports, “The economy will turn, demand will come back and the overcapacity of supply will disappear, oil and natural gas won’t be able to meet all the additional demand that’s required.”

If you want more information and to open your account do not hesitate to call me at 800-935-6487 or email me at pflynn@alaron.com. And see me each day on The Fox Business Network.