Did Deflation Fears Help Rally The Oil Market?
Posted by Phil Flynn I PFG Best Research • Friday, July 30. 2010 • Category: Rohstoffe
The Energy Report Friday July 30, 2010
Did Deflation fears help rally the oil market? Oil prices popped as the dollar index dropped hitting the lowest level since last April. The market seems convinced that the Euro zones problems are behind us so it appears that the carry commodity trade is back in play but could we see more problems up ahead?. Of course while the dollar has been trending lower and the Euro higher is this a sign that we are headed for a bought of commodity price inflation or are the markets more worried about deflation. Yesterday the markets heard some very provocative comments from Federal Reserve Bank of St. Louis President James Bullard who said that the US is closer to a Japanese-style (deflation) than at any time in recent history. Mr. Bullard said that in his opinion that the Fed should get ready to expand the quantitative easing program should the economy start to slow and send a clear signal to the markets that rates will remain near zero. This kind of talk of course is bullish for commodities.
As I have said from the first day that the Fed went to quantitative easing that the Fed just printed a floor under commodities. By creating inflation and money out of thin air the Fed changed not only the underlying value of a depreciated dollar but its entire price structure in regards to other commodities. If the Fed chooses they can create commodity price inflation and they hope some demand as they try to inspire economic activity by flooded the world with dollars. This is why oil prices remain stubbornly high despite a global glut of supply. Quantitative easing and essentially negative real interest rates has probably added a $10 to $25 a barrel premium to a barrel of oil. With the talk or more quantitative easing being too short commodities is a more dangerous proposition. At anytime they can run the printing press and change the fate of a commodity or at least its price. Of course there are dangers to this policy. If inflationary effect on oil outweighs the economic stimulus effect of lower long term rates, the oil drag on the US economy could drive us even closer to that Japanese Style deflationary funk. That is exactly the funk that we are trying to avoid. If the printing of money cannot inspire banks to lend and stir economic activity and job creation then all that is left is commodity price inflation that may restrict the type of growth that is necessary to promote the type of economic activity to restore the economy back to a normal path.
So what now should be apparent that at this stage of the recovery we now know that the Fed cannot do it on its own? The Fed has done what it had to do but now it now up to the lawmakers down in Washington. The next step that has to be taken is to make a plan to bring out of control spending under control and to cut corporate tax rates to restore confidence. You see based upon the near record low yields that we are seeing in the market place we still have fear gripping the market place. Washington has created no real long term plan to fix the deficit and right now is only adding to it. It has no plan to kick start the private sector and in fact has hurt the private sector by creating more uncertainty with financial regulation and health care bills.
Make sure you are getting my daily trade levels and make sure that you are watching the Fox Business Network. Just call me at 800-935-6487 or email me at pflynn@pfgbest.com.
Phil Flynn
Senior Market Analyst
800-935-6487
312-563-8344
pflynn@pfgbest.com
Phil Flynn is Energy Analyst and General Market Analyst with PFGBEST (www.pfgbest.com). Phil is one of the world’s leading energy market analysts, providing individual investors, professional traders and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline and energy markets. Phil’s market commentary, fundamental and technical analysis, and long-term forecasts are sought by industry executives, traders and global media.
Because he has been available to media around the clock, even during some of the most turbulent market periods in history, and because he has built a solid reputation for accuracy in his market analysis and forecasts, through thousands of interviews and broadcast appearances for more than a decade, Phil Flynn has become a headline-making name even as he continues to provide expert advice and customer care to his proprietary trading account clients.
Media highlights include: CNN, CNBC, Bloomberg, ABC, CBS with Katie Couric, NBC’s “Today Show” and “Nightly News with Tom Brokaw”, FOX’s “O’Reilly Factor”, PBS’s “The Newshour with Jim Lehrer” and “Nightly Business Report”, MSNBC’s “The News with Brian Williams”, Wall Street Journal Report, The Wall Street Journal, Business Week, Investor’s Business Daily, The New York Times, The Los Angeles Times, Chicago Tribune, Associated Press, The Toronto Globe & Mail, Houston Chronicle, Futures Magazine, National Public Radio’s Marketplace, a chat with the President of the United States, and many more venues.
You can read Phil’s daily market analysis and blogs at www.pfgbest.com.
PFGBEST is among the largest non-clearing U.S. Futures Commission Merchants, with customers, affiliates and brokerage offices in more than 80 countries. The company is a leader in sustainable investing through diversified products including managed funds, futures, forex, options, full-service and discount brokerage, trader education, market research, and direct online futures trading through its BESTDirect™ platform, and numerous other platforms and applications.
Phil’s commitment to and experience in futures trading is documented in two books, The Mind of a Trader (Financial Times/Pitman,1997), and Trading Online (publisher, date), both by Alpesh B. Patel. Phil is a lifelong resident of Illinois. He attended DaleyCollege in Chicago before beginning his career on the trading floor of the Chicago Mercantile Exchange.
Disclaimer
There is a substantial risk of loss in trading futures and options.Past performance is not indicative of future results. The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities. PFGBEST, its officers and directors may in the normal course of business have positions, which may or may not agree with the opinions expressed in this report. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.
Did Deflation fears help rally the oil market? Oil prices popped as the dollar index dropped hitting the lowest level since last April. The market seems convinced that the Euro zones problems are behind us so it appears that the carry commodity trade is back in play but could we see more problems up ahead?. Of course while the dollar has been trending lower and the Euro higher is this a sign that we are headed for a bought of commodity price inflation or are the markets more worried about deflation. Yesterday the markets heard some very provocative comments from Federal Reserve Bank of St. Louis President James Bullard who said that the US is closer to a Japanese-style (deflation) than at any time in recent history. Mr. Bullard said that in his opinion that the Fed should get ready to expand the quantitative easing program should the economy start to slow and send a clear signal to the markets that rates will remain near zero. This kind of talk of course is bullish for commodities.
As I have said from the first day that the Fed went to quantitative easing that the Fed just printed a floor under commodities. By creating inflation and money out of thin air the Fed changed not only the underlying value of a depreciated dollar but its entire price structure in regards to other commodities. If the Fed chooses they can create commodity price inflation and they hope some demand as they try to inspire economic activity by flooded the world with dollars. This is why oil prices remain stubbornly high despite a global glut of supply. Quantitative easing and essentially negative real interest rates has probably added a $10 to $25 a barrel premium to a barrel of oil. With the talk or more quantitative easing being too short commodities is a more dangerous proposition. At anytime they can run the printing press and change the fate of a commodity or at least its price. Of course there are dangers to this policy. If inflationary effect on oil outweighs the economic stimulus effect of lower long term rates, the oil drag on the US economy could drive us even closer to that Japanese Style deflationary funk. That is exactly the funk that we are trying to avoid. If the printing of money cannot inspire banks to lend and stir economic activity and job creation then all that is left is commodity price inflation that may restrict the type of growth that is necessary to promote the type of economic activity to restore the economy back to a normal path.
So what now should be apparent that at this stage of the recovery we now know that the Fed cannot do it on its own? The Fed has done what it had to do but now it now up to the lawmakers down in Washington. The next step that has to be taken is to make a plan to bring out of control spending under control and to cut corporate tax rates to restore confidence. You see based upon the near record low yields that we are seeing in the market place we still have fear gripping the market place. Washington has created no real long term plan to fix the deficit and right now is only adding to it. It has no plan to kick start the private sector and in fact has hurt the private sector by creating more uncertainty with financial regulation and health care bills.
Make sure you are getting my daily trade levels and make sure that you are watching the Fox Business Network. Just call me at 800-935-6487 or email me at pflynn@pfgbest.com.
Phil Flynn
Senior Market Analyst
800-935-6487
312-563-8344
pflynn@pfgbest.com
Phil Flynn is Energy Analyst and General Market Analyst with PFGBEST (www.pfgbest.com). Phil is one of the world’s leading energy market analysts, providing individual investors, professional traders and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline and energy markets. Phil’s market commentary, fundamental and technical analysis, and long-term forecasts are sought by industry executives, traders and global media.
Because he has been available to media around the clock, even during some of the most turbulent market periods in history, and because he has built a solid reputation for accuracy in his market analysis and forecasts, through thousands of interviews and broadcast appearances for more than a decade, Phil Flynn has become a headline-making name even as he continues to provide expert advice and customer care to his proprietary trading account clients.
Media highlights include: CNN, CNBC, Bloomberg, ABC, CBS with Katie Couric, NBC’s “Today Show” and “Nightly News with Tom Brokaw”, FOX’s “O’Reilly Factor”, PBS’s “The Newshour with Jim Lehrer” and “Nightly Business Report”, MSNBC’s “The News with Brian Williams”, Wall Street Journal Report, The Wall Street Journal, Business Week, Investor’s Business Daily, The New York Times, The Los Angeles Times, Chicago Tribune, Associated Press, The Toronto Globe & Mail, Houston Chronicle, Futures Magazine, National Public Radio’s Marketplace, a chat with the President of the United States, and many more venues.
You can read Phil’s daily market analysis and blogs at www.pfgbest.com.
PFGBEST is among the largest non-clearing U.S. Futures Commission Merchants, with customers, affiliates and brokerage offices in more than 80 countries. The company is a leader in sustainable investing through diversified products including managed funds, futures, forex, options, full-service and discount brokerage, trader education, market research, and direct online futures trading through its BESTDirect™ platform, and numerous other platforms and applications.
Phil’s commitment to and experience in futures trading is documented in two books, The Mind of a Trader (Financial Times/Pitman,1997), and Trading Online (publisher, date), both by Alpesh B. Patel. Phil is a lifelong resident of Illinois. He attended DaleyCollege in Chicago before beginning his career on the trading floor of the Chicago Mercantile Exchange.
Disclaimer
There is a substantial risk of loss in trading futures and options.Past performance is not indicative of future results. The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities. PFGBEST, its officers and directors may in the normal course of business have positions, which may or may not agree with the opinions expressed in this report. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.
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