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Why the Fed Loves Oil

04/30/2010 12:01 am EST


Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

Buy with the blessing of your Federal Reserve. Oil bulls just have to love the Federal Reserve, who came out and said in their post-rate decision statement to go ahead and buy some oil. OK, I admit they did not quite put it that way, but they might as well have. After telling the world that Fed fund target rates would continue in the range of zero to 0.25% and stay there for an extended period, they started to talk about how the economy was getting better. The Fed said that economic activity has continued to strengthen and that the labor market is beginning to improve. Now let me get this straight; the economy is improving and interest rates are staying low, and the extended period language remains the same. The Fed is saying to buy oil!

The Fed’s outlook was very positive. The central bank says that growth in household spending has picked up recently, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in non-residential structures is declining, and employers remain reluctant to add to payrolls. Housing starts have edged up, but remain at a depressed level. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability. Inflation fears? No worries, as the Fed says that “Substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.“

So forget those Greece worries and the news that Spain’s debt rating joined Portugal in going south. The Fed has provided the bulls some reassurance that we can continue to ride high on a sea of easy money. Still, one wonders whether the Fed would have tinkered with the extended period language if it were not for the fact that that debt brushfire in Greece was not spreading like a wildfire. Was the strong upbeat language in describing the economy the Fed’s way of saying that if it were not for the EU, we would be more aggressive in laying out an exit strategy from this stimulus crapulence?

Speaking of crapulence, the US is still drunk with crude oil supply The EIA reported some surprise as far as the end product, but crude supplies continue to rise. The EIA said that US commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 1.9 million barrels from the previous week. At 357.8 million barrels, US crude oil inventories are above the upper limit of the average range for this time of year. Total motor gasoline inventories decreased by 1.2 million barrels last week and are above the upper limit of the average range. Both finished gasoline inventories and blending component inventories decreased last week. Distillate fuel inventories increased by 2.9 million barrels and are above the upper boundary of the average range for this time of year.  According to Barbara Powell at Bloomberg, that puts supplies of crude 5.1% above the five-year average, gas supply 6.6% above the five-year average, and distillates 27.2% above the five-year average.

If you think your gas prices are high, then it is a good thing that you that you do not live in McGrath, Alaska! Gas prices there spiked to a whopping $9.20 a gallon! The AP reported that the residents of McGrath, Alaska, saw their gas prices jump by that amount in one night. The price at the only pump in the remote town 415 miles northwest of Anchorage went from $6 a gallon Friday to $9.20 the next day.

Crowley Petroleum Distribution says it was forced to raise the price because the winter nearly drained the town's supply, and the only option was to fly in more fuel. The cost increase is the difference between flying in the gasoline and shipping it on a barge. Crowley says it won't be able to send a barge until June at the earliest.

Even the most steadfast oil bulls are coming around to my way of thinking, and that is to try to play the ranges instead of being just stubbornly bullish (or bearish, for that matter). In fact, many commodities have been giving us very wide ranges, and if you can buy or sell near the high and low of those ranges, you can perhaps do very well. We have been giving numbers on projecting levels on both ends. Tonight, Pail Kavanaugh and I will be giving a Webinar on the strategy, as well as an outlook on oil and other markets.

By Phil Flynn of PFGBest Research

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