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Leonard Brecken

Leonard Brecken

Leonard is a former portfolio manager and principal at Brecken Capital LLC, a hedge fund focused on domestic equities. You can reach Leonard on Twitter.

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Oil, The Fed And The Ugly Truth About Capital Markets

As we as Americans wake up to more riots, one has to wonder if all is well with things. For six months now we have closely monitored the fundamentals of energy, witnessing an unprecedented amount of media distortions and trying to correct them one by one. The reality is that the fundamentals don’t matter as much in energy markets, and especially the bubble equity markets, which have long since decoupled from economic stats (unrigged that is) and earnings.

In any other time cries for recession would be very loud and markets would be correcting to reflect the realities of world debt levels and central banks run amuck. Not now and maybe not ever again. Instead we find ourselves as Americans held ransom to central banks worldwide and their actions, not fundaments, as we decide on where asset prices go. Related: Tesla Could Be Changing The Dynamics Of Global Energy

The fundamentals do matter but their weighting on the impact on prices is greatly reduced. As it stands now, oil prices have a better chance of reaching $80 or better if investors and especially the media finally admit that we are and have been in recession for a very long time and that economic stats have been so distorted that it renders them moot. The perfect example is the differences between U3 and U6 unemployment as a case in point on the level of distortion that exists today.

The 1% in the know who have seen their wealth double, have played the Fed money printing game for years, as it has distorted asset prices to the extreme from $120 oil to bubbles in technology and biotech. It’s almost like seeing Rome burn before our very eyes as the mass looting continues. The underlying mechanisms that once drove asset prices are no more as white is black and black is white driven by a select few at central banks who, by the way, have been mandated to do such things by our government or by the people for that matter, in America and around the world. Related: Have Natural Gas Prices Bottomed?

So here we are at a time when a QE4 event, as recession becomes a conscious event in the minds of Keynesian ideologues who think money printing does a thing to improve an economy (1Q15 GDP was the weather stupid!), would be the biggest catalyst for oil prices bar none. Since when does a recession result in higher oil prices? But strangely it would, as it would devalue the dollar signaling more inflation to the Fed front runners formerly known has investors. Is the public aware that their money is being invested simply to follow central bank actions vs. fundamentals? When the music stops they will learn the hard way as always.

In any event, QE4 would usher in the next cycle in commodities just like it did in 2009. Yes an OPEC cut, which is much less likely, would boost prices as would a significant drop in inventory levels at Cushing, but the reality is it’s all about central bank actions and has been for a while. The insistence for media/FED that rates are rising soon (white is black and black is white) runs counter to the case of QE4 ever coming. But the realities are the increasing riots in major cities throughout America aren’t about police as much as they are about the economy. Related: How To Spot An Undervalued Oil Company

The moral of the story is that if you are an oil bull you don’t hope for a better economy which would improve demand (as that won’t happen), but a recession that would lead to more central bank actions this time from our Fed vs. foreign central banks. Demand has improved not because of economic improvement (it’s gotten worse, in fact) but as a result of elasticity of demand via lower prices.

To reiterate, the incremental changes in US production and/or inventory will impact prices for the better but only to a certain extent, as we have already seen it has flattened the price curve and actually caused prices in 2016 and beyond to fall vs. months ago. The Fed wants (and so does the media) commodity prices low to spur growth and QE abroad and that is exactly what will continue to some extent despite changes in supply and demand going forward.

As a last comment, over 200 years ago we left Europe to found America, in part because our lives were under the thumb of oligarch’s whims, so is what is occurring now with central banks any different?

By Leonard Brecken of Oilprice.com

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  • economics on April 28 2015 said:
    Never thought I would read that in a oil blog.

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