QE3’s Impact On Oil Stocks: ‘Sugar High’ For Now

The Federal Reserve announced its third phase of quantitative easing last week, and oil prices immediately saw a short-term boost.

Crude oil prices even crested the benchmark $100-per-barrel mark after the Fed announced its latest round of economic stimulus. The move came the same week that the European Central Bank announced it would buy billions worth of Eurozone bonds to help insulate the region’s economy in the face of spiraling debt problems in Italy and Spain.

Julian Jessop, chief global economist at Toronto-based Capital Economics, warned oil investors not too expect a long-term boost from QE3. He notes that each additional dose of fiscal medicine is weaker than the last, especially give that economic conditions in the U.S. now are better than they were when QE1 and QE2 were unleashed.

“Accordingly commodity prices are likely to drop back as the focus returns to the continued deterioration in economic conditions, which makes stimulus necessary in the first place,” he says. Jessup adds that only one commodity should benefit long-term from QE3: “The only clear winner is gold.”

Most energy traders apparently agree with Jessup, calling last week’s oil price run-up a “sugar high” that will likely abate as economic realities trumped the pumping of $40 billion a month in the U.S. mortgage market.

Are Jessup and those traders correct in that analysis?

For this week, at least, it seems they are right on the money.

Oil prices rose from $97 to $99 in the 48 hours after the Fed’s QE3 decision. But this week, crude oil prices have plummeted $6, to $93 per barrel.

Yes, larger concerns about the global economy, and some debt issues in Spain, were large contributors to the weekly decline. But can energy investors expect a rebound as QE 3 takes hold?

Oil and Gas Investor sought out several industry insiders to provide some answers.

“Oil stocks ride the ups and the downs with the base commodity – WTI in the case of our U.S. stocks,” notes Chris Faulkner, chief executive of Irving, Texas-based Breitling Oil and Gas. “I would normally say go bullish on stocks post-QE3 but I don’t think that is the case, and the proverbial ‘third time is a charm’ may not apply here.”

Yet, he suggests that oil prices are not going to diminish.

“By no means am I saying oil stocks and crude are going to retreat,” Faulkner adds. “With the dollar weakening debate and the theory around oil as an alternative investment for foreign currency holders, it looks to be a flat 100 days for oil stocks and WTI. I would expect we are looking at a plus-$90 barrel price going into 2013, and that translates to a blasé and uneventful fourth-quarter 2012.”

Mike Tarsala, a chartered market technician with the New York City-based advisory firm Covester, warns that further quantitative easing could lead to inflation, and that could significantly impact oil stocks. “That’s what we saw in past rounds of Federal Reserve asset purchases, which were seen as inflationary.

“As a result, risky asset classes, including oil, rallied during QE1 and QE2,” he adds.

Gerald Sparrow, president of St. Louis-based Sparrow Capital, cues up an old quote attributed to a Wall Street legend. “A quote from Warren Buffet bears repeating. He once said that Japan had zero interest rates but with no economic growth.”

An analysis from Singapore-based JBC Energy Research Centre backs up that sentiment, noting in a research note that this week’s sell-off in oil “implies that this was no technical glitch, but rather a profit-taking strategy by major market participants that were worried about a price correction.”

Still, all is not lost on the oil investment front.

During the past three months, energy stocks have largely outperformed the broader stock market indices, suggesting that — QE3 or not — the outlook for oil stocks is actually sunnier than some analysts think. Note the chart below.


Original Article: http://www.oilandgasinvestor.com/Capital-Markets-Industry-News/QE3s-Impact-Oil-Stocks-Sugar-High-Now_107199 (subscription only for full article)

By Brian O’Connell, Special To Hart Energy