Saturday, July 28, 2012

Where is the QE3 Premium for Oil?

Despite more and more actions that make the initiation of Quantitative Easing 2 by the Federal Reserve more likely, the exchange traded fund for oil, United States Oil (NYSE: USO), is off in trading for the week. Even more paradoxical is the 43.25% short float for United States Oil.

Over the course of Quantitative Easing 2 from its introduction in August 2010 to its cessation in June 2011, United States Oil soared from the low 30s to the high 40s. Quantitative Easing 2 consisted of the Federal Reserve expanding its balance sheet to purchase about $700 billion in US Treasury Bonds.

As a result of this massive creation of Greenbacks without the corresponding economic growth in the United States, traders dumped US Dollars (NYSE: UUP) and bought hard assets such as oil, gold (NYSE: GLD) and silver (NYSE: SLV). As SPDR Gold Shares, the exchange traded fund for gold rose to being the second the most valuable exchange traded fund in terms of market capitalization behind that of only the SPDR S&P 500 Index (NYSE: SPY) with the UUP falling from around $26 to about $20.

The denouement of Quantitative Easing 2 was a downgrade of the credit rating of the United States Government in August 2011, the only time in history.

Testimony this week by Secretary of the Treasury Tim Geinthner combined with a front page article in The Wall Street Journal detailing the dissatisfaction of members of the Federal Reserve have the Dow Jones Industrial Average soaring as more economic stimulus measures, such as Quantitative Easing 3, are expected from the Federal Reserve. But for the last week of market action, USO is down 1.42%.

While it is trading above its 20-day and 50-day moving average, it is 9.42% lower than its 200-day moving average. In addition, volume today has been very weak, less than half its average. The last month of market action witnessed a double digit jump for USO of 11.42% with a very bullish candlestick pattern chart of long and engulfing bodies. Much of that can be attributed to increasing tensions in Iran, however.

Gold Bullion and silver have been basically flat for the last week and month of trading. Fundamental economic demand for oil appears to be topping as traders preparing for Quantitative Easing 3. The world’s largest importer of oil, China, reported economic growth for the second quarter of 2012 that is about 25% lower than its previous average. Europe is in a recession. South Korea just reported its lowest growth rate since 2009. India and Brazil, also big users of crude, are experiencing lower economic growth, too.

With the short float so high, it appears that traders are expecting the USO to trend lower, also.

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