Will LTRO2 Trigger SPR2? A Look at Oil vs Commodities
City Index February 27, 2012 2:45 PM
<p>As the ECB unleashes its LTRO-2 this week, the BoE starts off its QE3 and the Fed maintains hints/hopes of QE3, oil markets may well […]</p>
As the ECB unleashes its LTRO-2 this week, the BoE starts off its QE3 and the Fed maintains hints/hopes of QE3, oil markets may well start worrying about a potential SPR2–a 2nd round of strategic petroleum reserves release from the 28-nation International Energy Agency (IEA), following last June’s release, which we called it “QE for the oil market”. As central banks’ asset purchases support equities (and commodities), energy-importing nations may have little choice but to push for SPR2 despite the recent strengthening in their currencies against the greenback.
Meanwhile, rising oil prices may shadow eurozone debt concerns as the main culprit to a cooling global growth and the next pullback in equities. Yet, it’s worth charting the relationship between oil, commodities and equities. As rising oil prices move in tandem with equities and overall risk appetite, it becomes unclear whether higher energy prices are propped by demand optimism, supply concerns or overall speculative flows stemming from a weak US dollar and rising stocks. It can be a combination of all three.
Each of the three prior peaks in WTI/CRB ratio coincided with a decline in stocks, oil prices and commodities in general. The most recent of them was in late April 2011, occurring one week prior to the top in S&P500, Dow-30, FTSE-100 and the rest of all other indices. In our February 14th note, we made the fundamental and technical case for a preliminary 108 target in WTI. Upcoming pullbacks may be deemed as luring for the bulls as long as the Iran stand-off lingers. A close below 104 would place the short-term uptrend in jeopardy.
What about Brent?
How do we reconcile the fact that WTI is at 10-month highs relative to the CRB, while Brent is at an all time high relative to the CRB? Since Brent is more reflective of international demand for oil, the latest surge bears more implications for global growth than in previous occasions. The ongoing standoff between Iran and the nuclear agency may be a convenient catalyst for rising prices, but this is far from the first time markets witnessed belligerence from the oil producer. Expectations of an Israeli attack on Iran back in summer 2008 were just as high if not higher than today.
As the summer driving season nears and central bank asset purchases remain part and parcel of the financial system in the absence of any real structural solutions to the eurozone debt/growth ascent, Brent can extend gains to as high as the high $130s (WTI near $120s), aided by persistent USD weakness. But traders must not overlook the historic behavior in oil relative to overall commodities and the implications on global markets. It is unlikely to be different this time, especially if Fed QE3 never appears.
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.