Thursday, July 12, 2012

Oil Supported By QE3 Probability

With most investors believing it's inevitable that Ben Bernanke will institute another round of quantitative easing, it has helped support oil prices which otherwise would probably drop much further than the support it has found in the mid $80 a barrel range.

That has also helped shore up the price of other commodities as well, which would have otherwise plummeted even worse than they have been.

Add to that the enormous upward move of the U.S. dollar, weakening China and Brazil, along with devastated Europe, and you see how the price of commodities, outside of agriculture, should be dropping much more than they have.

But the bears have to be careful after learning from the past that Ben Bernanke's propensity to print money is insatiable, and it's only a matter of when he'll do it again, not if he's going to do it.

That's the great uncertainty in the market which keeps support under oil and other commodity prices. And that's even when everyone knows over the long haul more stimulus won't help the economy at all, but it will give a short-term psychological boost, which will push up the prices of many commodities.

Another support for commodities is in regard to the decision by European leaders to commit to taking further steps to shore up the system. While there are still no particulars there, it remains in the back of the mind of bears who would love to short the market even more, but could easily get hit hard if the Federal Reserve stimulates and Europe clarifies what steps it plans on taking going forward. Those elements, more than anything else, are keeping the price of oil from plummeting to below $50 a barrel at this time.

Unwillingness to bet against the probability of another round of quantitative easing is what's standing between the free fall of the price of most commodities.

That's why with oil the price will probably remain in the $80s until more clarity is revealed.

The next important moment is when Ben Bernanke addresses Congress next week about the state of the economy. Traders and investors will listen closely for any clue on which way things may go in the short term.

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