QE affected oil prices

Ever wonder if quantitative easing has any impact on oil prices? OPEC’s recent Monthly Oil Market Report (MOMR for short) throws light on this question.

The report says the stimulus measures have affected the oil market dynamics through three channels.

First, low yields in developed economies led to increased capital flows into emerging and, to some extent, developing economies. This supported higher GDP growth in these countries and increased demand for commodities. Second, the low interest rate environment allowed for investments to expand commodity production.

Finally, inexpensive funding and concerns about inflation led to increased speculative and hedging investment flows into commodity markets, particularly oil and gold.

Both commodities have been on a downtrend in the past couple of years. However, oil started to witness a sharp decline without any relief in the second half of 2014.

From a 2014 peak of $107.6 per barrel , it has fallen 59.5 per cent to $43.5 in January 2015.

One of the key factors for this tumble has been strong appreciation of the US dollar against major currenciesThe differing policies of developed countries also had an effect on currency markets.

Other commodity markets also remain in a downtrend. Lowering interest rates in emerging markets such as China and India could potentially lead to an increase in demand for crude oil.

However, there is a risk attached — if the US central bank increases interest rates faster than anticipated, it might lead to major capital outflows. This could, in turn, affect economic growth and oil demand.