After a two-day policy meeting this week, the US Federal Reserve left the door open to tapering its $85 billion monthly bond buying purchases, despite a 16-day government shutdown and a somewhat hazy picture of the US economy.
But oil prices may just be paying less attention to the “will they or won’t they” moves of the Fed in regards to tapering, which had been all the rage over the summer.
“The day-to-day correlation between oil prices and the Fed is breaking down. We are less correlated now than at the height of economic crisis in 2008 when the only thing [oil] had going for it was quantitative easing,” said Phil Flynn, senior analyst at Price Futures Group.
The correlation between oil prices, the Fed as well as the US dollar, is in lockstep when the economy is most stressed, but focus has been shifting more to the outlook for oil market fundamentals rather than monetary policy.
While the US economy is not necessarily thriving on all cylinders, it is no longer in a state of crisis seen five years ago.
At the same time, oil supplies in the US are raging, with domestic production at its highest level since March 1989, according to US Energy Information Administration data, leaving the US less reliant on imports of oil.
Amid record supply and production, oil prices are reacting more to fundamentals, leaving Fed policy less relevant in day-to-day moves.
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On Wednesday, the Fed released a statement after its policy meeting saying it is considering when to slow its bond buying program, but left the timing of that tapering unclear.
Oil futures reacted bearishly to what many say should be a bullish event for the market. In trading today, ICE December Brent fell to a three-month low of $105.80/b, and settled at $105.91/b, down $2.93. NYMEX December crude settled at its lowest level in four months at $94.61/b, down $1.77.
“The selling off of a bullish event was primarily due to the fact that everyone in the market was expecting the Fed to stand pat, with that event well priced into the market especially since the release of the below normal jobs report a few weeks ago,” said Dominick Chirichella of the Energy Market Institute.
Since the 16-day government shutdown, market experts had presumed that the Fed would delay its stimulus tapering, having only “kicked the can down the road” on a debt deal that extends US government spending until January 15 and lifts the debt limit until February 7.
Some analysts contend the bond buying purchases will remain in place until March, while others are now saying tapering could begin as soon as December. The partial federal government shutdown was said to have resulted in a 0.6% reduction in fourth quarter GDP and a loss of around $24 billion to the US economy.
Andrew Busch, editor and publisher of The Busch Update, said in a recent conference call for BMO Markets that markets like equities still have an upward bias on expectations that incoming US Federal Reserve Chairman Janet Yellen, who will take over for Ben Bernanke in January, “will continue to pump money into the system.” Yellen is expected to keep the Fed’s bond buying program in place and not taper stimulus just yet, Busch said.
Flynn agreed that Yellen is likely to be more dovish than Bernanke, who has nicknamed himself “Helicopter Ben” since he leans more towards easy money policy.
In a recent CNBC Fed survey, former Cleveland Fed President Lee Hoskins said that with Yellen as chair, “expect a weak response to rising inflation in the futures.”
Still, with Yellen likely to win Senate approval, Wall Street, according to the CNBC survey, now doesn’t believe the Fed will reduce its asset purchases until April 2014, compared with November 2013 in the prior survey.