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Page added on March 11, 2015
The Real (and Troubling) Reason Behind Lower Oil Prices
Sharma rightly points out, though, that supply and demand haven’t changed enough to create a 50% plunge in prices. Meanwhile, the price decline began not on the news of slower Chinese growth or Saudi announcements about supply, but last summer when the Fed announced that it planned to stop its quantitative easing program. Sharma and many others believe this program fueled a run up in asset buying in both emerging markets and commodities markets. “Easy money had kept oil prices artificially high for much longer than fundamentals warranted, as Chinese demand and oil supply had started to turn back in 2011, and oil prices have now merely returned to their long-term average,” says Sharma. “The end of the Fed’s quantitative easing has finally pricked the oil bubble.”
If this is the case, the fact that hot money could have such an effect on such a crucial everyday resource is worrisome. And the fact that the Fed’s QE, which was designed to buoy the real economy, has instead had the unintended and perverse effect of inflating asset prices is particularly disturbing. I think that regulatory attention on the financialization of the commodities markets will undoubtedly grow; for more on how it all works, check out this New York Times story on Goldman’s control of the aluminum markets. Amazing stuff.
Correction: The original version of this story misidentified Ruchir Sharma. He is the head of emerging markets for Morgan Stanley Investment Management.
13 Comments on "The Real (and Troubling) Reason Behind Lower Oil Prices"
penury on Wed, 11th Mar 2015 9:38 am
“And the fact that the Fed’s QE, which was designed to buoy the real economy, has instead had the unintended and perverse effect of inflating asset prices is particularly disturbing.” I find that this statement is particularly disturbing, It shows a complete lack of understanding of the QE program and invalidates the entire article.
Davy on Wed, 11th Mar 2015 10:22 am
Pen, I am not sure I am carrying with your drift. The QE programs globally and repressed rates are a fundamental reason for the frothy markets and asset prices globally. Isn’t this what this article said?
Makati1 on Wed, 11th Mar 2015 10:30 am
penury, most of the article is BS. The ability of consumers in the West to buy $100+ oil is gone. The recent flood of frak, tar sands, deep sea, etc., just made it worse. I don’t think anyone has a handle on oil prices these days.
Everyone wants to blame their pet scapegoat for the problem when it is just the fact that a world economy based on debt cannot last. The West is bankrupt. Western citizens and their wannabees, are moving down the income ladder by the hundreds of millions. Japan is in a deep depression. Europe is failing. And the US is panicking over the growing anti-dollar, anti-American sentiment spreading around the world as more and more countries move to the east.
Gonna be a hot summer, I think.
BobInget on Wed, 11th Mar 2015 10:35 am
It’s well known, India’s growth resurgence ate up a so called ‘China oil deficit’. India’s economy is growing faster at this point then China. India, soon equals then surpass China’s population. (2025)
Today, India is the fifth largest energy consumer in the world. While the world consumes 12000 million tonnes of oil equivalent (mtoe) of energy resources, India consumes 4.4% of the world total (524.2 mtoe). Global consumption of primary commercial energy (coal, oil & natural gas, nuclear and major hydro) has grown at a rate of 2.6% over the last decade. In India, the growth rate of Demand is around 6.8%, while the SUPPLY is expected to increase at a compounded annual growth rate (CAGR) of ONLY 1%.
Meanwhile, the US economy is steaming.
Summary of Weekly Petroleum Data for the Week Ending March 6, 2015
(excerpt)
Total products supplied over the last four-week period averaged 19.6 million barrels per
day, up by 5.5% from the same period last year. Over the last four weeks, motor gasoline product supplied averaged over 8.7 million barrels per day, up by 2.8% from the same period last year. Distillate fuel product supplied averaged 4.1 million barrels per day over the last four weeks, up by 12.8% from the same period last year. Jet fuel product supplied is up 10.5% compared to the same four-week period last year.
Davy on Wed, 11th Mar 2015 10:42 am
Mak, what’s your point? The west is doomed and the Asian Phoenix is rising? Your such an intellectual turd. Go hang out on your waco sites and let us rational people alone. We are talking about a troll that is dedicating himself to a personal agenda that contributes nothing to the objective search for the truth.
BobInget on Wed, 11th Mar 2015 10:57 am
“TIME” dances around this, the biggest (financial) corruption story of this decade.
International intrigue, religious and secular warfare the world hasn’t seen in hundreds of years, deaths of empires brought on by excessive militarism, magic thinking.
Rejection of two major scientific findings of utmost global importance: climate change and peak-oil. (Florida’s Governor story)
Shame on “TIME” . Their author, permitted
to go only so far exposing the real causes
of the so called ‘oil glut’.
I’m sure other sites like peakoil.com are
offering their own versions of this topic.
penury on Wed, 11th Mar 2015 10:59 am
Davy my disagreement with the statement is “Fed’s QE, which was designed to buoy the real economy, has instead had the unintended and perverse effect of inflating asset prices is particularly disturbing.” The Feds QE was never designed to buoy the real economy. The purpose of all the QE programs was to protect the banks and the bond holders. he Fed has no interest in the real economy as represented by the 90 per cent only in the interests of their share holders who as you know are the 1 per centers or maybe includes some of the 10 per centers. The fact of blowing asset bubbles was a feature of the program not an unforseen effect. I know that you are well aware of all of this and I post for the one or two who may be unaware that the Fed Res is neither Federal or a Reserve but a private corp whose stockholders are the major banks. As G. Carlin said “Its a big club and we are not in it.”
Davy on Wed, 11th Mar 2015 11:04 am
Yea, Pen, I agree with you now that you explained your point. I have also ranted multiple times in the past on the bankster whitewashing.
Plantagenet on Wed, 11th Mar 2015 11:22 am
Of course oil is a financial instrument. So is gold. That doesn’t change the fact that supply and demand play a big role in setting the price of oil and gold. No doubt some trading occurs based on other factors, like concern over obama’s war in Iraq and Syria, but that gets shaken out pretty quickly.
Perk Earl on Wed, 11th Mar 2015 11:25 am
Penury & Davy, here is an article explaining why stocks (equities) went up:
http://trendshare.org/how-to-invest/what-did-quantitative-easing-do-to-the-stock-market
“What Does Bond Buying Do to the Stock Market?”
Where do you invest your money and why? You probably have a mixture of risk tolerance and the desire for a good return. Buying a US government bond or a bank bond is safe, but you won’t get much return. When the Fed has an effective zero percent interest rate and where the Federal Reserve bond buying program (that’s quantitative easing again), the interest rate paid by bonds will be very low. In fact, if there’s any inflation at all, you’ll lose money by investing in these short-term bonds.
That money has to go somewhere.
The Fed hopes some of it will get spent. The Fed wants it to circulate through the economy. Ideally a lot of it will go to things that
circulate through the economy. Ideally a lot of it will go to things like small business loans and cheaper mortgages. A lot of those investment dollars went into the stock market.
It’s no surprise that the S&P 500 Index had around 30% returns in 2013 and, with dividends reinvested, a 14% return in 2014. People wanted to buy stocks because they thought they’d get a better return than from investing in bonds. This isn’t a surprise. When bond interest rates go down, stock prices tend to go up.
Revi on Wed, 11th Mar 2015 1:01 pm
It’s like the end of the monopoly game where we are all creeping around the board hoping to land on free parking and staying in jail for the three turns that we can, while a few own boardwalk and park place. We are all just hoping to pass go and get $200.
Seriously, we are driving less and less because we can’t afford it. Every time I go anywhere I either get something I need or I do something that I can use as miles for my taxes. I don’t just drive around any more, and a lot of people are thinking like me. The age of easy motoring is over!
yoananda on Wed, 11th Mar 2015 1:01 pm
Still … oil prices droped when QE ended.
Amvet on Wed, 11th Mar 2015 2:14 pm
People who have looked at the amount and timing of massive futures trades think oil prices, gold prices, silver prices, etc are controlled by the giant banks and funds and have nothing to do with suppyl and demand. Many banks use a leverage of 40 or more in their trading.