What the "Yellen Effect" Ultimately Means for Oil Prices

Dr. Kent Moors

Janet Yellen sure has a way with the market…

As the Fed Chair delivered her unexpectedly dovish message, the Dow bounced almost 400 points off yesterday's lows.

Even so, that move paled in comparison to the even bigger move she triggered in oil prices.

West Texas Intermediate (WTI) soared 3.7%, only to be topped by Brent, which jumped by 4.4%. That easily topped the 1.29% move in the Dow.

Yet the dramatic market turnaround seemed rather counterintuitive. After all, as the pundits pointed out and are sure to hammer on, nothing the Fed Chair said indicated a retreat from any pending rate hike.

In fact, the intentional deletion of the word "patience," used to describe the Fed's approach to rate hikes, makes the move guaranteed.

So why all of the market exuberance?

Here's my take on the "Yellen Effect" and what it means for oil…

A Market Built on Cheap Money

One reason for the big market move may simply be the recognition that the rate hike is not happening tomorrow. The consensus is building that the impending rate hike now won't happen as early as the previous forecast, early next quarter.

The concerns expressed by Yellen about the overall economic improvement and the unemployment picture telegraphed to the markets that there were enough ongoing worries to mitigate a rapid change in rate policy.

However, when it comes to reactions in the oil markets such as those on March 19, which clearly outdistanced the markets as a whole, there is a more decisive factor in play…

A dovish statement means the availability of cheap money will last a little bit longer in the oil patch.

Of course, this grabbed the attention of all of the other market players as well. Even with all the discussion about how the Fed's quantitative easing has set us up for a mighty fall (not all of which is incorrect), the attitude of the market toward cheap money is rather different. They thrive on it.

The truth is, a big portion of the stock market rally since the end of the credit slump has come on the back of cheap money.

And while markets may appreciate the need for restraint in the face of "irrational exuberance" and may provide a nod in the direction of the "Chicago School" style of economic theory, they just don't invest that way.

In the same way that the Fed's zero-interest rate policies have been a boon to the stock market, the flood of cheap money has been a lifeline to oil companies. The big jump in oil prices on March 19 is, in large measure, a reflection of that.

The reason for this is something I recently addressed as the critical part of the briefing I gave at Windsor Castle less than two weeks ago…

Dr. Kent Moors

About the Author

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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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