BP Receiving Crude as Repayment for Iraq Work

The dramatic 10-month drop in the price of oil could be due to ultra-loose monetary policy by the U.S. Federal Reserve, according to a senior analyst at a major financial services company.

Mark Lewis from Kepler Cheuvreux said on Monday that the boom in U.S. shale gas production over the last few years that had helped push down oil prices was partly driven by the Fed’s “very, very low interest rates.”

“The financial dimension to the shale story is hugely important,” he told CNBC. “I think it’s questionable whether we would ever have had the increase in oil production we’ve had out of the shale plays over the last three or four years if we hadn’t been in this environment.”

The Fed has held its target range for the federal funds rate at 0-0.25 percent since the end of 2008. With rates so low, banks have been able to lend money at cheaper rates than would be usual in a healthy economic environment.

Lewis said that the nascent shale industry—in which the “unconventional” gas is drilled from the ground in a process known as hydraulic fracturing or “fracking”— has boomed as a result of access to ultra-cheap financing, flooding the market as a result.

Many analysts, including the International Energy Agency, see high U.S production as a key factor behind the price drop, along with global weak demand and the Organization of the Petroleum Exporting Countries (OPEC)’s refusal to cut its own production.

The Fed started aggressively expanding its balance sheet shortly after the global financial crash of 2008, in a program that became known as QE 1. The central bank then started a second program in 2010, before launching its third open-ended $85 billion-a-month program in late 2012.

This aggressive easing has now been dialed back and the Fed is widely expected to raise its main benchmark interest rate this year.

via CNBC

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza