What does the jobs report, yield curve and the Fed Fund futures say about a potential coming top in the price of oil? Could we be seeing the beginning of the end of the recent bull-run? Once again the macro picture that has been driving the oil market is showing signs that things could be beginning to change. Oil has been driven by the dollar, the printing of money and gobs and gobs of economic stimulus. We have been moving on the inflationary impact of change you can believe in but a change in Fed policy may change our price outlook and perhaps the bull market in oil may be limited.
Oil has rallied basically since the Federal Reserve went to a policy of quantitative easing is now facing uncertainty as the yield curve starts to widen and the Fed fund futures are signaling a change in Fed policy. It appears that government and Fed policy are having mixed effects and Friday, after a better than expected reading on non-farm payrolls, the long end of the curve saw yields continue to go higher. The rising yield and the expansion of the yield curve means that the Fed will soon have to end its policy of printing money and sends a signal to the government that this deficit spending has to come to a stop. Fed fund futures increased the odds for an interest rate increase to over 50% for next November which means the market is saying that the Fed may have to raise rates a lot sooner than expected.
If, as I contend, the major increase in the price of oil is due to the policies of the Federal Reserve then signs of a reversal of that policy would mean a reversal of the bull market that we have seen in oil and other commodities. In other words, if the Fed and the government starts to apply the brakes to the economy it could apply the brakes to the price of oil. We have to be aware that the run in oil was created by the government and can die by the government.
Of course there are other issues. Russia again is threatening to cut off gas supply to the Ukraine. Not only that my buddy Linda Rafield over at Platts reported that the Russian government is making a call to remove all speculative capital from the oil market. How is he going to do that? I guess the same way he moved Mikhail Khodorkovsky into a prison and took over his oil company YUKO’s. Rafield writes that Russia is calling for better regulation of the global oil market in order to remove speculative capital and secure transparency.
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We're long July crude from apprx 5959 – raise stop to 6490!!!
Buy July heating oil at 16200 - stop 15700.
Buy July RBOB at 18500 - stop 16900.
We're long July natural gas from apprx 390 – stop to stop 367.
