Commodity Daily News

Crude Oil Market Signals QE3 on the Way

Spot crude oil prices have peaked above the psychological barrier of $100 and have extended gains following the release of stronger than expected industrial production numbers and inflationary data that showed prices in the US declined more than forecasted. Crude oil prices have been on a tear since the end of October, rising over 33%

The quick appreciation in spot crude oil prices may be based on two assumptions; a recovering US economy and expectations of QE3 from the Fed. Yesterday data showed US industrial production in the month of October rose 0.7% on consensus forecasts of 0.4% growth. This comes on the heels of stronger retail sales data released on Tuesday.

Declining inflationary pressures in the US may also force the Fed to act to curb any threat of deflation. Data released on Wednesday showed consumer prices fell in October with CPI contracting by -0.1% m/m on forecasts for 0.0%. This follows Tuesday's PPI numbers that showed producer prices declined by -0.3% in October.

As Bernanke said in a speech in Cleveland in late September, the Fed has the tools to act should the risk of falling prices become apparent. This would suggest another round of bond buying (QE3) to support the US economy. While this would likely be a negative for the USD, perhaps the gains in crude oil prices suggest markets are already pricing in QE3.