Why are Crude Oil Prices Going Down?

Why has the price of crude oil been going south? According to yesterday's Wall Street Journal,

Light, sweet crude oil for October delivery on the New York Mercantile Exchange, ahead of the contract's expiration Thursday, slid $3.31, to settle at $91.98 a barrel. The drop was the biggest in a single day since July 23 and put prices at their lowest level since Aug. 3.

I thought that QE3 would lead to higher oil prices as the dollar continues to lose value and the price of mortgage backed securities, with an artificial push from the Fed, goes up more briskly  than it would if left to its own devices.

Saudi Arabia wants oil prices to go down, according to the article. And the slower US economy leads to a reduction in demand, which leads to lower prices.

Other factors are at work, according to the Journal:

Lower oil demand reflects the weaker economy and high retail-fuel prices. Demand for gasoline, the most widely used petroleum product in the world's biggest oil consumer, also has been reduced by improved vehicle-mileage standards, according to the EIA.

In another WSJ article, this one from September 5 of this year, another factor enters into the mix:

In the wake of Hurricane Isaac's swing through the Gulf Coast over the weekend, analysts expect oil-inventory data from the Energy Information Administration to show big drawdowns in inventories occurred last week, along with a sharp slowdown in refinery operations.

The bottom line is I believe that because of QE3, crude oil prices will begin to rise, overcoming hurricanes and limited demand and every other factor known to man. The only question, which is what separates the good traders from the also-rans, is when. 

 
GoodBread:
Actually... QE3 has probably already been priced in.

Agreed. Also, QE3 seems like a continuation of Twist as opposed to an entirely new program. So, if Twist simply never stopped, then it'd be weird if it wasn't already priced in.

"My caddie's chauffeur informs me that a bank is a place where people put money that isn't properly invested."
 
Best Response
mikesswimn:
GoodBread:
Actually... QE3 has probably already been priced in.

Agreed. Also, QE3 seems like a continuation of Twist as opposed to an entirely new program. So, if Twist simply never stopped, then it'd be weird if it wasn't already priced in.

Actually, I would disagree with you there. I agree that QE3 has been priced to an extent, but operation twist was a different beast than QE3. Twist was simply swapping short term securities for longer ones, driving shorter rates up and longer rates down. Flatten the curve! Now, the Fed has essentially said we are going to buy 40b a month of mortgage backed securities in, and i emphasize this, perpetuity. Think about this. Bernanke said that he will buy around ~500 billion a year in mortgages until the economy begins a sustainable recover and will continue said policies throughout the recovery until the Fed is convinced it will work without them.

What this did initially was send long term rates higher, which probably surprised the fed, but sent mortgage rates lower. That's the whole point. They have been trying to get people to buy houses whether people want to or not. In fact, bernanke even stated he wanted house appreciation so that people would be inclined to buy houses thinking they will make a profit. WHOETHOWIHTOP. I can't even form words when I hear something like that. Anyway, my point is that this is finally Bernanke saying "look. We can't fight unemployment. In fact, although we have made some negligible strides, its ugly. Oh, and our ZIRP policies haven't spurred a sustainable recovery. So, now we are just going to outright buy the damn mortgages and force rates so low that you CAN'T NOT buy a home. And we will throw in a side of asset inflation so everyone feels even better about what we are doing!"

Sorry, didn't mean to be long winded. I've had too much coffee already this morning. haha.

 
Addinator:
Actually, I would disagree with you there. I agree that QE3 has been priced to an extent, but operation twist was a different beast than QE3. Twist was simply swapping short term securities for longer ones, driving shorter rates up and longer rates down. Flatten the curve! Now, the Fed has essentially said we are going to buy 40b a month of mortgage backed securities in, and i emphasize this, perpetuity.

Okay, I'm on cup of coffee #2, my turn to be long winded, hahaha.

Yes, you're absolutely right about twist being a sterilized program, selling short term bonds, buying long term bonds and that QE3 appears to be an unsterilized program (only buying long term). But, from where I'm sitting, these differences are only in theory, as the Fed simply ran out of short term bonds to sell!

Quick, back-of-the-envelope calculation, looks like the Fed has $1.7 trillion in it's SOMA account, and only 8.6% of it's holdings (Agency, T-Notes & T-Bonds, TIPS) has a maturity date in 3 or less years (let me know if I've totally borked that calculation, definitely a possibility). (see: http://www.newyorkfed.org/markets/soma/sysopen_accholdings.html)

So, the only reason I'm saying that QE3 is an extention of Twist isn't because they're the same beast (you're absolutely right, they're not), but because moving from a sterilized program to an unsterilized one is a natural progression when you completely lose the ability to sterilize.

ADS;LKJASD;LKFJSLDFKJSFD..... ugh, I hope I completely jacked up that calc and everything I said is utterly and completely wrong because, otherwise, what a shit show. Please someone correct me before I have an aneurysm.

Sorry for being long winded, coffee is pretty awesome, haha.

"My caddie's chauffeur informs me that a bank is a place where people put money that isn't properly invested."
 

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