Commodity prices: buoyed by QE2 and speculative investment inflows

Share |

17 November 2010, Oil

oilandgasobserver archive

The US Federal Reserve continues to spearhead efforts to jumpstart the global economy and on November 12 launched a second wave of monetary expansion, or quantitative easing, nicknamed QE2. Over the next eight months, the Fed will conduct asset purchases of US treasuries, essentially monetizing government debt, to the tune of $75bn (GBP47bn) a month.

The Fed maintains a dual mandate to maximize employment and promote stable prices, but since embarking upon the first round of quantitative easing in March 2009 it has failed on both counts. The US unemployment rate remains stubbornly fixed around 9.6% and although inflationary pressures have failed to show up in the Consumer Price Index, they are appearing elsewhere in the form of asset price bubbles.

In short, the Fed's aim is to stimulate bank lending, weaken the dollar to help fuel exports, and reflate asset prices in order to alleviate debt burdens. The US's loose monetary policy, however, is being exported elsewhere, as nearly 40 countries maintain some form of peg to the US dollar and therefore have little autonomy over domestic interest rates. This liquidity is flowing beyond the US and into emerging markets, global equities, and the commodities complex in search of higher yields.

Oil prices have been a prime beneficiary of QE2, hitting a 25-month high of close to $90 per barrel within weeks of the Fed's initial announcements of renewed easing. Elsewhere, gold, often considered a leading indicator of inflation, hit fresh record highs, breaching the $1,400/ounce threshold over the same period. Across the board, natural resources prices have been rising sharply, whether in metals, agricultural, or energy commodities, with the gains in the price of petroleum wholly unjustified by its underlying neutral to bearish market fundamentals.

With stocks of crude oil and products running close to historically high levels, and supply set to exceed demand in 2010, speculative investment inflows, in Datamonitor's view, are driving the price up. Investor interest in energy and the broader commodities complex is expected to remain strong as the asset class, not dissimilar to what we saw in 2008, provides a refuge from currency debasement and future inflationary pressures fueled by the Fed's experimental and unprecedented easing measures.

Source: Datamonitor

More Oil Commentary

Recent commentary