Monetary Base Breaks Out

Data released by the Fed today confirmed that the Monetary Base has officially risen above the range that it had settled in since July of 2011.  Since roughly the same time period brent crude oil and gold have also been stuck in a prolonged sideways move, although in recent weeks crude has also begun to turn higher along with the base.

Monetary Base So. Close. To Breaking. Out…

The weekly update of the monetary base shows that QE is finally starting to show up on the Fed’s balance sheet.  The base is very close to breaking out to a new high three full months into QE3.  As a reminder, one of the reasons we pay such close attention to the monetary base is that it’s been highly correlated to oil and gold prices since QE began in 2009.

Base Money Supply Price of Oil QE

Checking in on the Brent WTI Spread

WTI crude has relatively quietly climbed back into the mid $90 range while Brent continues to be well over the psychologically important $100 mark.  Over the last few weeks the spread between the two has narrowed slightly but is still elevated.  If the spread finally compresses in 2013 the price of WTI would increase by 20% assuming Brent holds its price.  If the global oil price were to rise on top of that, investors who primarily watch the WTI price of oil could see a significant rise.

Brent WTI Crude Oil Spread

Schlumberger 2Q12 Conference Call Highlights

Quote from SLB on its macro outlook:

Let’s then turn around to the macroenvironment, where the continuing Eurozone crisis, coupled with the disappointing numbers from China and the U.S., has led to downward revisions of the outlook for GDP growth and oil demand. High production output from OPEC also lead to a period of crude inventory buildup during the quarter, which, together with fares or lower demand, brought Brent crude prices briefly below $90 before recovering. 

At the same time, global spare capacity for oil is at the lowest level for 5 years and there continue to be a risk of potential production disruption from geopolitical events.
The situation in the global economy remains unsettled, and it seems increasingly clear that the present macro uncertainties will remain for a considerable period of time. 

In this environment, we believe Brent crude prices, in general, will be supported around current levels, although they could be subject to periods of considerable volatility. Continued macro uncertainty coupled with price volatility could make customers more cautious in terms of future activity plans. However, in the international markets, we have seen no signs of this so far. We maintain, absent a future significant setback to the world economy, our safety view that international activity will grow in excess of 10% this year.