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Will Oil Fall Again?

Due to Quantitative Easing 3, oil is now around $100 with United States Oil, (NYSE: USO), the exchange traded fund, up 16.47% for the quarter .

This is what happened over the course of Quantitative Easing 2, which was announced in August 2010 by Federal Reserve Chairman Ben Bernanke at the Jackson Hole economic policy summit and took place from November 2010 to June 2011.  Quantitative Easing 2 consisted of the Federal Reserve inflating its balance sheet to purchase $700 billion in US Treasury Bonds to finance the American budget deficit as no other buyers were willing to purchase the securities at such low interest rates.  Oil rose, but then fell due to a lack of basic economic demand.

There is much pointing to oil staying higher, except for the power of market forces in action.   Middle East OPEC nations are committed to oil at $100 a barrel to be able to pay for the domestic programs that e have been instituted to prevent an “Arab Spring” uprising in these countries.  Quantitative Easing 3 has traders selling fiat currencies and buying oil as the printing presses are running at full bore, devaluing paper assets.  The Federal Reserve’s commitment to a low interest rate policy has those oil companies with healthy dividend yields very attractive.

But the fundamental economic demanding is missing.  Economic growth is falling in the United States and China, the two biggest consumers of oil.  Europe is in a recession.  Fracking has resulted in natural gas becoming much cheaper, motivating many to focus on utilizing this fossil fuel as much as possible.  The same is also happening with coal.

Oil fell after Quantitative Easing 2.  There were strong speculative forces at play at that time, too.   At the present, the short float for United States Oil is.  A short float of 5% is considered to be troubling.  Obviously, many are betting that the fundamentals of supply and demand will triumph over speculators, as has always happened in the past; and will always take place.


 

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