Recent developments in the oil market have caught many by surprise. Just when it seemed that oil prices were stabilizing around $50 per barrel, they unexpectedly fell by more than 2%, reaching approximately $48.74. This decline raises concerns that prices could continue to plunge further.
As reported by the Wall Street Journal, the upward momentum in crude oil prices came to a halt last week when U.S. data revealed the highest domestic crude inventories in nearly 80 years.
To put this into perspective, we haven’t seen such an abundance of oil in the U.S. since 1935, smack in the middle of the Great Depression. A recent report from Morgan Stanley cautioned that upcoming U.S. data about supply and drilling trends is likely to show even more concerning signs. It suggests that the oversupply may only intensify.
When there’s an excess of supply, prices inevitably decline to balance demand. Although the extent of this potential drop remains uncertain, it is likely that to rectify the 80-year high in inventories, oil prices will need to decrease significantly.
U.S. oil producers were optimistic for a swift recovery in prices during the first quarter of 2015. Unfortunately for industry investors and workers, a protracted and challenging period seems imminent. We will continue to monitor these developments and bring you the latest updates as they arise.
Overtly Opaque
In the meantime, the Federal Reserve has provided further ambiguous statements about its monetary policy. During her testimony before the Senate Banking Committee, Fed Chair Janet Yellen’s comments suggested a lack of clarity regarding the Fed’s direction. She commented, “If economic conditions continue to improve, as the committee [Federal Open Market Committee] anticipates, the committee will at some point begin considering an increase in the target range for the federal funds rate on a meeting-by-meeting basis,” Yellen stated.
In some professions, such as defense attorneys, obscuring the issue can be advantageous. Muddling the facts can sometimes help in defending the indefensible. Similarly, the Fed seems to be intentionally clouding its policy intentions in order to maintain flexibility and delay any market panic.
The Fed’s desire to avoid signaling any potential interest rate hikes stems from its fear of disturbing market stability, which could lead to significant sell-offs.
The reality is, the Fed finds itself in a precarious situation. Six years of maintaining zero interest rates combined with a substantial 400% increase in the money supply has left the Fed with few options. The path they’ve taken makes a return to traditional policy challenging without risking a severe financial crisis.
This predicament is likely what keeps Yellen awake at night, prompting the opaque communication of the Fed’s next moves.
From Bad to Worse in a Big Way
Without question, we’re experiencing an extraordinary moment in our economy. There’s no going back; the Fed is compelled to incessantly drive credit expansion. A sudden dip in credit growth, similar to what occurred in 2008, could unleash chaos. Markets would react sharply, traders and investors would panic, and the call for the Fed to intervene would be deafening.
Currently, the situation seems stable. Stock indices are reaching for new highs, but there’s a looming risk of a blow-off phase that could send stock prices soaring. However, stocks cannot rise indefinitely; they are bound by market fundamentals. When the correction finally arrives, we could witness large-scale economic interventions.
Such measures might include banks imposing negative interest rates on savers, or the government borrowing newly created money from the Fed and injecting it directly into individual bank accounts, possibly marketing it as some form of rebate. The Fed may even resort to creating money to buy directly in the stock market.
In essence, the current economic strategies could lead to a significant deterioration of the situation, turning things from bad to worse.
Best regards,
MN Gordon
for Economic Prism
Return from From Bad to Worse in a Big Way to Economic Prism
