The market has that easy money feeling again, a phenomenon that was thought to be fading into the rear view mirror on the heels of the US economy. The in-action of the fed last month coupled with the soft jobs data from Friday have market participants acting as if zero interest rates are here for good. In fact, if one pays attention, we are starting to hear some pundits call for additional measures, i.e. quantitative easing (QE). While it is a stretch to imagine such a move, the FOMC committee does seem to be not only concerned with the global picture but may possibly be increasingly concerned with domestic growth as well considering that the strong jobs data that they have hung their hats on as of late appears to have dried up, at least for now.
The effect on the crude oil market is significant as well, as we are seeing weakness in the dollar based on low rates for longer inspiring a rally in the petroleum markets. This demand side bid is interesting as the easy money argument comes from lack of global demand. This oxymoron of sorts would not be enough to continue the rally that started last week and has continued into today with crude approaching 49 dollars. For some, this rally comes as a total surprise, as many of the big firms have been touting crude in the 30s, with some even talking about the 20s (for WTI). The rally was a little earlier than expected, as we were looking for a retest of the 42.50 price level before the rally higher. Friday's US rig count shrinking by 26 rigs was fuel to the fire that seemed to be gaining momentum for the past several sessions. Additionally, there is talk about a global conference featuring primarily Russia and Saudi Arabia exploring ideas around price supports. The mere mention of such an event is enough to get the buy the rumor mill to begin pushing prices higher, regardless of if it actually takes place or if it produces any policy changes.
One of the interesting developments in the recent price action can be found in the spread between the WTI and the Brent crude. As demand in the States appears significantly stronger than the rest of the globe, we are seeing a narrowing of the differential with the Brent only trading about $3.50 higher than the WTI. This effect is mainly due to the different prognoses from the largest economies, with China leading the way down and potentially the US leading the way up. Additionally, the landscape of crude trade around the world continues to change, as the major producers of yesterday are starting to turn to refining their own crude rather than exporting the raw material, particularly the Saudis, who deal in Brent crude. Therefore, it has been reasonable to expect the spread to tighten as the idea of exportable WTI becomes a more talked about possibility.
Natural gas continues to hover with very little volatility in the mid $2.40s, as we seemingly wait on whether or not the weather will turn significantly as we head into hurricane season and colder temps in the Midwest and Northeast. The heat wave out west appears to have subsided for the time being and has not made its way substantially across the country, but forecasts continue to look for unseasonably warm temperatures keeping a cap on the price discovery for now.
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