Best of the Week
Most Popular
1. Climate Change Mass Extinction - Birds, Bees and Bugs: Going Going Gone - Richard_Mills
2.A Purrrfect Gold Price Setup! - Peter_Degraaf
3.Who Finances America's Borrowing? Recession Indicator for Independent Thinkers Part 2 - F_F_Wiley
4.America’s One-sided Domestic Financial War - Raymond_Matison
5.Gold Price Summer Doldrums - Zeal_LLC
6.Two Key Events Will Unleash Gold - Jim_Willie_CB
7.Billionaire Schools Teacher in NAFTA Trade Talks - Richard_Mills
8.Get Out Of Crypto Cannabis Bubble Before It Pops and Move Into Bargain Basement Miners - Jeb_Handwerger
9.Stock Market Could Pullback for 1-2 weeks, But Medium Term Bullish - Troy_Bombardia
10.G7 Chaos, Central Banks and US Fed Will Drive Stock Prices This Week - Chris_Vermeulen
Last 7 days
US Stocks Set For Further Advances As Q2 Earnings Start - 15th Jul 18
Stock Market vs. Gold, Long-term Treasury Yields, 10yr-2yr Yield Curve 3 Amigo's Update - 15th Jul 18
China vs the US - The Road to War - 14th Jul 18
Uncle Sam’s Debt-Money System Is Immoral, Tantamount to Theft - 14th Jul 18
Staying in a Caravan - UK Summer Holidays 2018 - Cayton Bay Hoseasons Holiday Park - 14th Jul 18
Gold Stocks Summer Lows - 14th Jul 18
Trump US Trade War With China, Europe Consequences, Implications and Forecasts - 13th Jul 18
Gold Standard Requirements & Currency Crisis - 13th Jul 18
Focus on the Greenback, Will USD Fall Below Euro 1.6? - 13th Jul 18
Stock Market Outlook 2018 - Bullish or Bearish - 13th Jul 18
Rising Inflation is Not Bearish for Stocks - 13th Jul 18
Bitcoin Picture Less Than Pretty - 13th Jul 18
How International Observers Undervalue the Chinese Bond Market - 13th Jul 18
Stocks Trying to Break Higher Again, Will They? - 12th Jul 18
The Rise and Fall of Global Trade – Redux - 12th Jul 18
Corporate Earnings Q2 2018 Will Probably be Strong. What This Means for Stocks - 12th Jul 18
Is the Relative Strength in Gold Miners to Gold Price Significant? - 12th Jul 18
Live Cattle Commodity Trading Analysis - 12th Jul 18
Gold’s & Silver’s Reversals’ Reversal - 12th Jul 18
The Value of Bitcoin - 11th Jul 18
America a Nation Built on Lies - 11th Jul 18
China, Asia and Emerging Markets Could Result In Chaos - 11th Jul 18
Bullish Gold Markets in the Big Picture? - 11th Jul 18
A Public Bank for Los Angeles? City Council Puts It to the Voters - 11th Jul 18
Yield Curve Inversion a Remarkably Accurate Warning Indicator For Economic & Market Peril - 11th Jul 18
Argentina Should Scrap the Peso and Dollarize - 11th Jul 18
Can the Stock Market Close Higher For a Record 10th Year in a Row? - 11th Jul 18
Why Life Insurance Is A Must In Financial Planning - 9th Jul 18
Crude Oil Possibly Setting Up For A Big Downside Move - 9th Jul 18
BREAKING: New Tech Just Unlocked A Trillion Barrels Of Oil - 9th Jul 18
How Trade Wars Penalize Asian Currencies - 9th Jul 18
Another Stock Market Drop Next Week? - 9th Jul 18
Are the Stock Market Bulls Starting to Run? - 9th Jul 18

Market Oracle FREE Newsletter

5 "Tells" that the Stock Markets Are About to Reverse

What the Fed's Interest Rate "Hold" Means for Crude Oil Prices

Commodities / Crude Oil Sep 21, 2015 - 12:56 PM GMT

By: ...

Commodities

MoneyMorning.com Dr. Kent Moors writes: The nine years of historically low interest rates will continue in the wake of Fed Chairwoman Janet Yellen's decision to not hike rates – to not yet remove the proverbial punchbowl from the easy-money party.

It was a classic "50-50" proposition; it didn't seem likely the Fed would move to roil global markets, but given the perceived strength of the labor market, a hike wasn't out of the question.


Before Yellen decides to pull the trigger, we'll see price volatility spiral across all global markets – especially when it comes to crude.

So now the oil "doom and dread" crowd and their bearish predictions are running rampant.

Here's why they're dead wrong…

The Irrational Frenzy Surrounding the Fed's (In)Decision

Rarely has a decision (or lack thereof) by the U.S. Federal Reserve engendered such a frenzy among market analysts and investors.

But let's be honest here. Any eventual hike isn't likely to exceed 25 basis points (0.25%) and will be a stand-alone. This is hardly going to be the breach in the dam that results in a series of increases unfolding every month or so.

And bond markets have already factored this in, with rates across the board rising much beyond the projected Fed move.

Still, there is the emotional reaction to the hike, and that is certain to inject another bout of volatility.

This is a matter of concern for other markets…

Last week, I visited several European countries where many conversations I had touched upon the Fed decision. What's interesting to me is that most of my contacts would have preferred the Fed to just get it over with. A move on Thursday would have allowed the effect to occur and then markets to adjust.

Remember, as the United States prepares to leave central bank manipulation of fixed-income issuances, Europe, China, and others are embracing economic stimulus as well.

That contrast could exacerbate the market's reaction to any interest rate hike this year.

So what specifically does this mean for crude?

The Short-Term Effects of a Rate Hike on Oil Prices

The presumption is that a rise would put immediate pressure on crude oil prices by making purchases more expensive in foreign markets.

This is because a rise in rates results in dollar-denominated bonds becoming more attractive, thereby increasing the exchange value of dollars against other currencies.

And that's what will have the greatest initial impact on oil. Because the vast majority of oil sales worldwide are denominated in dollars, a rise in the dollar means it costs more in other currencies to buy a barrel of oil.

Conventional "wisdom" holds that this has an adverse impact on demand. All other things equal, there may be a change, even if short-lived.

However, the real effect on demand centers on what impact the rise in both the price of oil and the exchange value of the dollar will have on a range of economic matters…

It's Demand That Really Determines Long-Term Energy Prices

In this respect, the broader usage of energy (beyond simply that of oil) will be at issue. Market demand for all manner of energy will ultimately be determined by genuine demand, not by stimulated usage from lower prices.

After all, almost without exception, depressed prices (such as we've experienced in spades during the past several months) tend to increase the use of energy. And as energy becomes cheaper, end users increase consumption.

But the real impact will be felt across a broader range of commodities – metals, processed products, natural gas, even electricity traveling across borders.

Yet in all, this will be quite manageable, with the negative impact of any interest rise in my view greatly overestimated.

What will take a bigger hit are the artificial pressures that have been distorting the actual market rates for oil. Here the hyped short selling and multiplication of derivatives through which manipulators have artificially made profits from a crude dive will be distorted.

That bubble will be more pronounced, but that is going to be a problem primarily for those who created it.

That's karma for you…

Now, the important point to remember is this: Energy demand elements are emerging that far outweigh the significance of any Fed move likely in 2015. Because while the fixation on a rise in interest rates continues, aggregate expected global oil demand is moving up regardless.

Both the International Energy Agency (IEA) in Paris and the OPEC Secretariat in Vienna are poised to yet again raise year-end 2015 oil demand figures.

The current forecasts are already high, with the IEA predicting that global oil demand this year will average 94.2 million barrels per day, 1.6 million more than last year.

For next year, the IEA is forecasting 95.6 million barrels per day.

And supply won't be able to keep up with rising demand. Global oil supply, mostly from non-OPEC producers, fell by 600,000 barrels per day in July.

So the fundamentals paint a picture of tightening oil supply at a time of increasing demand.

That will be where the real long-term pricing of oil is going to be determined. Because as long as the world demands energy – and those demands are increasing – the energy sector will prosper.

And we'll find ways to make money.

Follow us on Twitter ;@moneymorning and on Facebook.

Source http://moneymorning.com/2015/09/17/what-todays-fed-decision-means-for-oil-prices/

Money Morning/The Money Map Report

©2015 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.


© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules