There’s some risk of exaggeration in the following, but it is probably right to a large degree:
Phil Flynn of The Energy Market Report believes that the oil market’s dynamics were forever changed the day the Fed bought $300 billion of U.S. bonds. It caused a monumental rally:
It has almost been a year since the day the oil market was changed forever. After collapsing in a heap of deflationary despair, oil was saved by what could only be described as a historic government intervention. It was the day that the US Federal Reserve changed the world by printing more money and therefore, essentially putting a floor under the price of oil.
And to this day this government intervention and newly created Fed policy inspired the largest move in crude oil prices there has ever been even when considering geo-political events or even data on supply and demand.
Here’s the specific event in question:
On March 18, 2009 the Federal Open Market committee changed the world when they said that, “the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.” In other words, in one sentence the Federal Reserve basically created $300 billion dollars out of thin air.
Which created a huge oil-hiking carry trade overnight:
This instant money creation had a major impact on oil and how it was viewed. Instead of looking to supply and demand we now had to revalue oil on the perceived value of global current exchange rate. The Fed move helped create what was called the mother of all carry trades. Traders taking advantage of the Fed’s negative interest rates sold dollars and borrowed money to essentially buy oil. The price of oil is now a creation of the Fed.
The author actually believes there is a downturn ahead for oil prices nonetheless, as the U.S. eases back economic stimulus. There’s a floor for oil due to the Fed according to Mr. Flynn, but it is down at $40. So trade it from there, he says. It makes a lot of sense if you simply see it as a medium term effect on the oil market, rather than ‘forever’.