(July 30 2012)
Starting on Tuesday, American Federal Reserve policy makers will participate in a two-day meeting. When that meeting ends on Wednesday, an official statement will be released to the public. Investors will be paying close attention to any clues into another round of quantitative easing.
On Thursday the governing council of the European Central Bank will meet in Frankfurt. Last week’s statement by ECB president Mario Draghi that the ECB would do “whatever it takes” to save the euro, but offered no real solutions. For investors to continue to believe the Chief’s bullish statement, some concrete plan will have to come out of the upcoming meeting.
Oil futures edged lower Monday, after a four-day winning streak. Crude for September delivery declined 35 cents, or 0.4%, to $89.78 a barrel on the New York Mercantile Exchange. Trading was light, as were moves ahead of the Central Bank meeting. If the Central Banks decide to take further, decisive actions, such as a round of quantitative easing to stoke their economies, oil is positioned for a rally.
Oil would rally on such action as monetary stimulus boosts economic growth, and when economies grow, they need more oil. An American stimulus package would act extra impetus to oil’s upswing as it would likely cause the U.S. dollar to lose some strength. Oil, a dollar dominated commodity, sees higher international demand when the value of the greenback decreases relative international currencies.
Indecision remains on whether or not banks will take such actions, and as of last week oil speculators were cutting their net-long positions. According to the IntercontinentalExchange Inc.’sweekly Commitment of Traders report published Monday, money managers, including hedge funds, held a net long position of 77,510 contracts in the week ended July 24, down 1.5% from the week before. The net long position is the difference between the number of long positions, or bets that prices will rise, and short positions, or bets that prices will fall. When the number of net-long positions decrease, it means less traders are betting on higher oil prices.
Still, looking forward traders comment they remain bullish on long-term prices, with the Iranian oil embargo a significant factor in support for higher prices.