Why the Fed's QE Policy is Bullish for Oil Prices

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Most investors have followed what the Fed's QE policy has done to gold, but few realize its impact on oil prices.

Recently, I talked about how crude was beginning to occupy a position as a store of market value ("Why Oil Is Becoming the New 'Gold Standard," May 20, 2013). The development has been a direct consequence of the flight from holding gold.

That flight may be tapering and a new floor established for the next major spike by the metal.

The problem is there is no agreement on which direction that move will be…

These days, a sudden improvement in gold prices may only extend as far as hedge funds and institutional investors covering shorts.

Nonetheless, there is an interesting parallel developing between the plight of gold and crude oil prices.

The Consequences of Quantitative Easing

It results from what is becoming a popular mantra – Fed policy has resulted in the creation of phantom assets, a curious rise in bond rates despite the continuing central bank buying of U.S. Treasuries and related paper, and the specter of another asset bubble forming.

Now I have several points of issue with the underlying assumptions of this approach. Yet that is not the focus of this article.

My focus today involves an unattractive (one of several) consequence of Quantitative Easing (which we'll likely have a few more months of after this week's FOMC meeting).

Despite buybacks, U.S. Treasury prices have been declining, resulting in a rise in yields (interest rates). A number of economists have argued that this will require the Fed to initiate policies supporting bond prices.

That move will almost certainly fuel the fires of inflation. Such concerns have been there all along with QE.

According to an increasingly held approach by some economists, holding rates at 0% for eight consecutive quarters would result in significant inflation anyway. Nobody knows for sure because the current experiment has never been attempted before.

Nevertheless, widening uncertainty about navigating such uncharted waters has discounted the view that QE could ever be a long-term strategy. It may also explain the conflicting statements coming from Fed members over when the bank gets out of the surrogate money business.

Oil Prices and Quantitative Easing

And this brings us back to the potential impact on oil (and gold)…

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About the Author

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle

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