It is almost been a year since the day the oil market was changed forever. After collapsing in a heap of deflationary despair, oil was saved by what could only be described as a historic government intervention. It was the day that the US Federal Reserve changed the world by printing more money and therefore, essentially putting a floor under the price of oil. It was the day that the Federal Reserve, after having nowhere to go on interest rates, made a move to save the banks and the economy by taking the unprecedented step to use quantitative easing in the United States to save our economy.
This move of course changed the way oil moved and was valued. And to this day this government intervention and newly created Fed policy inspired the largest move in crude oil prices there has ever been even when considering geo-political events or even data on supply and demand. As we come upon the one year anniversary let’s look back and see how the global oil market was changed and what that means for our future.
A year ago the economic world was stunned. We were 6 months away from the collapse of Lehman Brothers investment bank, a failure thought almost impossible. The world started to realize that this sub-prime crisis was a much larger problem than at first glance and wasn’t going to go away very easily. The Federal Reserve was aggressive and moved the target range for the federal funds rate at 0 to 1/4 percent and even took the step to buy some bad assets like mortgage backed securities from the banks. Yet despite these moves and some short term stabilization in the market place many markets still seemed frozen.
Oil, despite a three month spike in price, appeared to be getting ready for a collapse of its own. Tight credit and still plunging demand made price prospects dim. It was obvious that because of lack of confidence and real problems with toxic assets still festering in our nation’s banks, that even a zero percent fed funds rate would not be enough to ward of deflationary fears. Demand destruction was rampant. Oh yes, oil had recovered from its January lows but that was after we had experienced the biggest peak to valley price drop in the history of the oil market reflecting what was the biggest peak to valley drop in the history of oil demand. This drop in demand reflected the fact that the economy was still contracting and we were getting ready to see more de-leveraging and more deflation.....Read the entire article.
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