Oil price tussle

It’s been a tug-of-war on oil price recently that saw oil price see-sawing. Here’s the chart showing oil price movement over the past week:


Series of events that influenced oil price:

A – Bernanke’s comment that the Fed needs to remain cautious and maintain a supportive monetary policy. Oil price edges up.
B – Talks on release of strategic oil stock between France, US and Britain (following which the US makes a counter-claim). At the same time, (i presume not coincidentally) Saudi Arabia claims they will act to push down oil prices. Market reacts and oil price falls.
C – Concerns on global supply disruption and positive U.S. manufacturing data pushes up oil price.
D – Fed minutes signal reservation for fresh stimulus pulls down oil price.
E – Jump in US crude stockpile sends oil price tumbling.

What is interesting to me is the seemingly contradictory drivers of oil price. Under normal circumstances, an improving economy should bring about an increase in oil consumption and therefore drive up oil price. However, when the Fed says there may not be a need to continue their accommodative policy (because of a chance that the economy is improving), oil price tumbles. This seems to suggest that money supply is the bigger driver of oil price. If the Fed continues to be accommodative, inflation will follow. The rise in oil price is seen as a serious threat to the global economy, as flagged by the IMF chief. It seems that policy makers are going all out to get oil price under control (as seen in events B and D above), and they have somewhat succeeded.

Another observation is that you can never know what the Fed will do next. Barely a week after the “remain cautious” comment, they seemed to have reversed course, though without saying for sure. The primary function of the Fed is probably to get you to think in terms of how they want you to think, rather than actually taking actions that will lead you to think so. As we have seen, this is actually good enough to affect the relative strength of the US dollar and oil price. Nevertheless, ultimately, real supply/demand prices everything.

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