How the Fed Rate Cut Influenced the Oil Market
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How the Fed Rate Cut Influenced the Oil Market

by | published August 2nd, 2019

Sometimes, the stock market and the White House converge to create a very interesting situation. The past two days are a good example.

After much anticipation, Fed interest rates were cut and the market began to react.

There were two days of focus on the Democrat party debates.

And finally, President Trump imposed tariffs late yesterday afternoon on the remaining $300 billion in Chinese imports.

None of this goes much beyond unwarranted reaction. Unfortunately, both have negative impacts on the investment climate in general, and the energy sector in particular.

Let’s take a look…

Tensions Are Increasing Fast

The disappointment was pervasive.

The Fed cut only 25 basis points off the overnight rate (some of my colleagues were lobbying for at least 50) and then said it may be not be anything more than a one-time adjustment. In response, the stock market immediately dropped, and oil prices declined along with it.

The reason was obvious. Amid an almost decade-long and record-setting stock market advance, some investors have concluded that it can only be sustained by re-introducing cheap money. This, in turn, dampens expectations on future economic sustainability, and that draws the attention of oil traders.

The tariff decision has an even greater impact.

Yesterday, the Dow was surging ahead by 300 points when the announcement was made. It promptly reversed some 600 points by close and is moving further today.

Now, there is no question about the perceived global economic impact with this move. It sent shivers across the world and prompted a dive in West Texas Intermediate (WTI), the benchmark crude oil rate set in daily in New York, unlike anything experienced in recent memory – 7.9% in less than three hours.

The latest tariff decision came just as U.S.-China talks were resuming, and it effectively undercuts whatever consensus was developing to serve as a basis for negotiations.

This parallels last week’s Trump Administration decision to sanction the Iranian Foreign Minister. That ends any chance of a negotiated resolution in the Persian Gulf, and clearly indicates the U.S. government’s mistrust of diplomatic routes to lessen crises.

Beijing, however, will be quick in responding to the latest tariffs.

The Biggest Loser: America

My sources tell me that they will apply equivalent fees on staple consumer goods coming into the U.S. from China – computers and accessories, cell phones, clothing, and related apparel (backpacks, etc.).

If you haven’t done so already, buy the kids’ back to school necessities now – the prices will be moving up shortly.

That is the important point in all of this. The primary loser in the expanding trade war will be the American consumer. Yes, the Chinese economy will also suffer, but Beijing is already repositioning its trading routes to offset need for trade with the U.S.

While not yet on the immediate list, some of my Asian contacts are now worrying about another levy against U.S. liquefied natural gas (LNG) and crude oil/refined product imports – already subject to duties following the last tit-for-tat.

That, combined with reports that up to 14 million barrels of Iranian crude oil imports are currently in storage at Chinese ports, will have a negatives impact on oil/gas prices should: (1) the reprisals to Trump’s latest tariffs extend to LNG/oil; and (2) China actually dumps the crude storage on the market. The latter move could easily cut $7-9 off the price.

In both the reaction to the Fed and Trump’s latest foreign policy number, there is one overarching question that is pervasive in my mind:

Where is the common sense in all of this?

Sincerely,


Kent

P.S. The geopolitical tensions are coming to a head in several places, but where I’m focusing my interest on these days has been the South China Sea. The Chinese are upping their game with missile tests – and they’re some of the most powerful weapons I’ve seen in some time. But the U.S. is not going to take something like that lying down, which is why this defense contractor has been seeing some impressive funding coming from the Pentagon. Click here to read more.

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