Oil trading on hopes of stimulus

THOUGH oil is in the middle of a bullish trend, prices find themselves pushed and pulled between potential stimulus measures, that could drive price on the upside, and the threat of oversupply, dragging the price back down.

With weak macro data coming out of China and markets on tenterhooks in anticipation of the US Federal Reserve meeting later in the week, oil has been pushed to one week highs around the $96 a barrel mark. This has been driven by speculation that one, or both, of the economic superpowers will roll out stimulus measures to get their economies moving again.

A third round of quantitative easing from the Fed would trigger a bout of risk-on trading – driving oil prices higher, as well as gold and equities. But just how much of a boost that move would give to risk-on trades is open to debate. The European Central Bank agreed last week to ramp up bond purchases to try to plug the holes in the Eurozone; and the Fed already has two progressively larger rounds of quantitative easing (QE) under its belt. As such, the markets have a certain level of stimulus fatigue. When the Fed launched its first QE programme between April 2009 and March 2010, oil prices rocketed 71 percent. But in the second round, between November 2010 and July 2011, they rose a more restrained 21 per cent. This is admittedly still quite a return on investment, but this period also coincided with the Arab Spring when there were oil supply disruptions and political instability in many of the world’s largest oil producing states.

But while oil bulls may be flaring their nostrils at the prospect of monetary stimulus measures, they are less happy about the potential for another form of stimulus that could be on the horizon. White House officials met last week to discuss the possibility of a release from the US Strategic Petroleum Reserve (SPR) to rein in high gasoline and crude prices. The SPR currently holds around 700m barrels of crude. With the US presidential elections less than two months away, a move to bring down prices on the forecourt would have an obvious attraction for the Obama administration.

For those trading oil in the short term, this week is going to be all about news-driven markets rather than fundamentals. Should the Fed roll out QE3, its boost to oil prices will likely swamp out any chatter of a SPR release and the impact of oversupply on prices. Like the rest of the markets, oil traders will be betting on Bernanke’s words on Thursday, rather than the contents of Saudi’s pipelines.