When Gas Is This Cheap, Who Needs QE?

While the U.S. gets ready to end QE, it seems the U.S. is getting stimulated in a different way, courtesy of Big Oil.

Consumer confidence soared in October, as gas prices fell, proving once again that the way to win the heart of America is cheap gas prices. In fact, the Conference Board said consumer sentiment hit 94.5, the highest level since October 2007, the same month that then Fed Chairman Ben Bernanke started to lower U.S. interest rates as he started to realize that failures in the subprime market were indicative of a much larger unfolding economic crisis. I think it is interesting to note that on Tuesday, the day before the Federal Reserve is likely to end QE, news comes that the confidence of the consumer is back to where it was when most investors and consumers where oblivious to any problems in the economy.

One of the reasons that the Fed can dare act is the economic cover that low gas prices and surging US energy production can provide. While Economic policies coming out of Washington have put a drag on the economy, the boost provided by big oil cannot be underestimated. Just the recent drop in price could add another 1.5% to our GDP, not to mention the positive impact that reduced imports and increased exports on our overall trade deficits. The U.S. oil and gas industry has provided the US with 9,833,200 jobs, according to the American Petroleum Institute, not to mention $1,209 billion in economic activity.

Yet with increased consumer confidence we are also now seeing signs of better gas demand, and that may slow the recent oil market meltdown. The American Petroleum Institute released a report that reported a 3.7 million barrel drop in U.S. gas supply. While some of that was seasonal in nature, it also reelected the fact that gasoline demand is improving almost as much as consumer confidence.

Crude stocks on the other hand continue to build, as crude supply increased by 3.2 million barrels. In the Cushing Oklahoma delivery point supply increased by just 274,000, a number that may bring in some buying and some short covering.

Distillates that include Jet fuel and diesel fell 3 million barrels, mainly driven by demand from U.S. farmers that are filling their equipment with diesel for harvest.

With the Fed decision to end QE seemingly priced in and with better demand numbers, oil should mount a recovery rally and retest around the 8475 area. RBOB Gasoline looks poised to shoot for around 225 and distillate around 254. That is assuming that the Energy Information Administration confirms the spirit of the API report.

Of course, OPEC is still trying to come to grips with falling prices. Dow Jones reported that the Chief of OPEC Abdallah Salem el-Badri says that half of U.S. shale production could be shut down if oil prices stay low. Perhaps wishful thinking, but it also show that OPEC’s plans to flood the market is a direct assault on the U.S. shale producer.

Abdallah Salem el-Badri also said that the impact of falling oil prices on OPEC has been muted by hedging. Of course, hedging would not have been possible without OPEC’s favorite scapegoat, the oil market speculator. It seems the folks that OPEC loves to hate, and blames on for tanking oil prices are the same ones that provided a vehicle for them to remain afloat. You’re Welcome.

Natural Gas also looks like it is getting support. Weather is starting to get colder and we should be close to a seasonal bottom. Besides if gasoline prices stay low we might decide to keep our house a bit warmer and the thermostat set higher as we will feel less stress about the monthly bill.

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