- US Crude oil turned negative on Monday, throwing the oil market into panic mode.
- How long until the Federal Reserve adds oil to the long list of things it’s willing to buy to prop up the economy?
- Trump wants to buy 75 million barrels and hold in the Strategic Petroleum Reserve.
The Federal Reserve has plunged new depths of insanity since the stock market crashed in March.
It’s been a no-holds-barred assault of monetary stimulus.
Jerome Powell ramped up the printing press and pumped trillions into the financial markets.
Interest rates slashed to zero. Credit extensions. QE infinity.
The Fed’s balance sheet has now expanded by $2 trillion with more on the way.
They’re buying everything. Commercial paper, mortgage-backed securities, exchange-traded funds.
The Fed’s asset purchase program is now ‘unlimited’. They will buy as much as they need to, indefinitely.
It’s the kitchen sink and then some. Whatever it takes to keep the economy going (and the Dow Jones pumping).
So what about oil?
Will the Fed start buying oil?
It’s a tongue-in-cheek question and it sounds ridiculous.
But I would have said the same thing about the Fed buying junk bonds two months ago.
At this point, nothing is off limits. Talk has already shifted to the Fed purchasing stocks directly.
Former Federal Reserve chairwoman Janet Yellen even suggested that Congress consider expanding the Fed’s power to buy other assets.
Oil crashes below zero
You’ve already seen the headlines. U.S. crude oil crashed below zero on Monday in a historic bout of trading.
A molotov cocktail of low demand and overflowing storage means oil producers were forced to pay buyers to take the barrels away.
This is a crisis. It will likely ravage US employment in the oil and gas industry. And it will rock prices of fuel for the average consumer.
With that in mind, consider the Federal Reserve’s mandate:
The objectives as mandated by the Congress in the Federal Reserve Act are promoting (1) maximum employment, which means all Americans that want to work are gainfully employed, and (2) stable prices for the goods and services we all purchase.
It is literally the Fed’s job to support employment and maintain stable prices for consumer goods.
Powell could certainly justify the decision if he did start buying oil.
Trump will probably beat the Fed to it
Even if the Federal Reserve doesn’t start loading up on barrels of oil, the president might.
Trump is looking to add 75 million barrels of to America’s Strategic Petroleum Reserves. He told reporters last night:
This is a great time to buy oil. And we’d like to have Congress approve it so instead of just storing it for the big companies. So we’re going to either ask for permission to buy it or we’ll store it.
The Strategic Petroleum Reserves is a federally-owned oil storage facility, stored in deep underground bunkers near the Gulf of Mexico. There is currently space for 78.5 million barrels and Trump wants to fill it.
At a minimum, we’ll let people store it and charge for it. If we can buy it for nothing, we’re going to take everything we can get. The only thing I like better than that is when they pay you to take the oil. But that’s a short term squeeze, you understand that? So I don’t think you’re going to see that.
As the Wall Street Journal pointed out, the government could even make a profit if they bought at today’s prices and agreed to deliver in December. Trump doesn’t currently have this power and would need permission from Congress.
The Fed is already propping up oil, in a roundabout way
I am (sort of) joking about the Fed buying oil. But the vast stimulus package is already working in favour of the oil industry.
Oil companies like ExxonMobil, Chevron, and Conoco are eligible for $19.4 billion in benefits from the latest stimulus package.
And guess who’s the biggest beneficiary of the Fed’s junk bond-buying spree? Yep, the energy industry. Oil and gas companies are the biggest issuer of junk bonds, accounting for 11% of the market.
Powell isn’t stocking up on oil barrels just yet. But he might be soon.
Last modified: September 23, 2020 1:50 PM