It’s been a big week for the markets as a whole and energy products specifically. The fallout from the soft jobs data continues to manifest itself in the price discovery through the notion that bad news is good as it forces the Fed to keep the spigot of easy money flowing free. The equity markets have been the largest recipient of this good favor after rebounding from just over a 14% decline from the all time highs to get back above the psychological 2000 barrier yesterday afternoon and maintaining that level into the early morning trade today.
The question is can it maintain this rally and return to a bull market with the current global economic landscape. The street seems to think that lower for longer rates would imply that the run way is cleared for lift off. However, when looking at the situation more logically, it would seem that continuation of the behavior that has produced these slumping economies may not be the best way to induce confidence, the real driver in price discovery. More directly, the idea of easy money as a crisis management tool has merits and certainly one can argue that through the 2008 crisis it was necessary and worked well. The problem comes when economies get ‘married’ to this life support and can no longer function without. This global addiction to easy money appears to have reached its zenith. The demand questions that have arisen in the mast 2 months or so have done so despite the very accommodative global policies. It would seem that these policies efficacy is starting to wear thin, yet the market still takes the dovish inferences as bullish. We should look for that to change as it appears only the market can finally dictate to the Fed and other central banks that the time for normalization is probably already past.
For the WTI markets, this is only part of the story. Demand for refined products is soaring, particularly at these price levels. Supplies are at all times highs, somewhat neutralizing the bullish nature of that strong demand. For this reason we have seen a relatively tight crude market for the past several weeks until the geo political fundamentals started to insert themselves this week into the price action. Russia’s action in Syria has sparked a fear bid in the energies as the goals of the Russians appear to be the opposite of Western allies. While there is little in Syria that would have a major affect on petroleum pricing, there is some major concern about the US and Russia being in any sort of military face off that has potential to rapidly escalate. It is assumed that Russia is looking for an ally for pipeline needs for natural gas. For the most part, this type of a story ends up being a ‘buy the rumor, sell the fact’ type of event. Close monitoring of the situation for some sort of non military solution could lead to a strong sell opportunity in the crude but certainly not going into a weekend.
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