Oil tops $50 on belief that Fed's actions will stimulate economy
Mar 19th 2009 1:00PM
Updated Dec 4th 2009 11:21AM
There's nothing like accommodative monetary policy to gladden the hearts of the oil market's bulls. Oil raced six percent higher Thursday, gaining $3.12 to $51.26 per barrel on the belief the U.S. Federal Reserve's additional quantitative easing Wednesday will provide the boost needed to jump start the U.S. economy from its pronounced recession.
Energy Trader Paul Schmidt says the jump start analogy is apt. "Think of the U.S. economy as a car that's been immobilized with a weak battery, and the Fed as a tow truck with great charging power. The Fed is providing the boost we need to get the economy running again," Schmidt said. "And that's bullish for oil." Schmidt added that he was long with an oil trade, with a monthly contract.
The Fed's action "will help heal credit markets, which should make credit more available to businesses and consumers, over a period of quarters," Schmidt added.
The other major energy commodities also jumped Thursday at mid-day on the emergence of bullish oil sentiment. Heating oil surged 10 cents to $1.36 per gallon, unleaded gasoline added 8 cents to $1.45 cents per gallon, and natural gas rocketed 40 cents to $4.09 per million BTUs.
$100 oil ahead? Not likely
Still, investors thinking that oil is going to quickly make a return trip to the $100-plus levels recorded during the leverage bubble are using the wrong economic model, Schmidt says. "Investors have to keep in mind, we're still looking at months of modest oil demand and especially low gasoline demand in the U.S.," Schmidt said. "We had more than three million drivers taken off the road in the U.S. in the past year and China's growth rate has been effectively cut in half, so that implies only modest oil demand, even assuming a U.S. recovery late in 2009."
With the above in mind, Schmidt thinks $60-65 oil is possible in 2009, "if the Middle East flares up or if Iran does something irresponsible," but more than likely, "oil will trade in a $40-55 range for the bulk of the year."
Oil Analysis: Is this the demise of the oil bears? That is, is the end of the oil bear market at hand? Not so fast. The Fed's action Wednesday is shifting sentiment, but the "reality of the facts on the ground," to borrow a phrase from former Israeli Prime Minister and General Ariel Sharon, says oil's path of least resistance remains lower. There is considerably excess oil in inventory, and until OPEC cuts production and/or economic growth sops up that excess, a $40-55 range for 2009, as Schmidt noted, looks likely.