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Stimulus Stall

07/30/2020 6:32 am EST

Focus: ENERGY

Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

Phil Flynn breaks down the potential for another round of stimulus and its impact on energy markets.

Talk of a stimulus stall is holding crude oil back a bit after a surprisingly bullish 6.829 million barrel crude oil draw. The draw in part may be storm influenced in the United States yet should be on a path of falling supply in the coming weeks and should continue to keep oil in an upward trend. Part of the crude comeback has been fueled by both fiscal and monetary policy.

Hopes for another shot of stimulus from Washington may be in doubt as both sides seem to be far apart on some issues and may be drawing lines in the sand. And that is not to say the Republican stimulus proposal is big enough. It has its faults as the fiscal hawks want to reign in a substantial extension of unemployment. Still, it ups the ante for the Federal Reserve that not only has assured the market of low rates today but also that they have more tools in their arsenal if Washington politicians put partisan politics ahead of the good of the American people.

Still, the crude oil draw gives oil bulls a leg up and, if confirmed by the Energy Information Administration, should send oil back towards the mid-$40s. The focus had moved away from Cushing, a delivery hub that was all the rage when we thought the world was running out of storage, where supplies increased by 1.144 million barrels to the Gulf Coast. The Gulf Coast will be where we feel the OPEC cuts on U.S. oil imports.

Oil products are also of interest as second wave fears of the Coronavirus could impact demand. The API reported that U.S. gasoline supply increased by 1.144 million barrels and distillate up by 187,000 barrels.

We still are bullish on the complex. The pressure on the politicians in Washington will be overwhelming for a compromise. The Fed will do their part. The Wall Street Journal reported, “Federal Reserve officials are likely to continue their debate Wednesday about how to provide more support to the economy now that interest rates are pinned near zero but are unlikely to announce significant policy changes. The central bank releases an updated policy statement at 2 p.m. Eastern time after the conclusion of its two-day meeting. Fed Chairman Jerome Powell follows with a news conference starting at 2:30 p.m., at which he could explain how he and his colleagues are thinking about possible additional steps.

The economic backdrop has changed notably since the Fed’s rate-setting committee met seven weeks ago, mostly for the worse. After surprising rebounds in employment in May and June, many states have seen significant increases in virus infections, leading to renewed curbs on certain commercial activities and a dampening of consumer confidence.

Since mid-June, the Fed has been buying $80 billion in Treasury a month and $40 billion in mortgage bonds, net of redemptions. But they are considering how to pivot from a program focused primarily on stabilizing markets toward one that provides stimulus. They have bought $2.5 trillion in assets since March. To complete this transition, they could announce for how long they plan to continue any purchases and any changes in the composition of the Treasuries they are purchasing. The Fed’s bond-purchase programs last decade targeted longer-term securities to drive down long-term yields to spur borrowing. There is less urgency for the Fed to do this right now because long-term yields are very low.

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