Is Oil going to come to the Fed's Rescue?

A strange question to ask, perhaps, with oil hovering just above $54 on Nymex; still, an interview in Business Week with a Thompson IFR analyst (Tim Evans) leads me to ask just that. Mr Evans has a contrarian view, the main points of which can be summarised thus:

1. Oil demand growth is lower now than in previous years, when oil prices did not rise as much;
2. Oil production is cyclical, and we are suffering the effects of $12 oil in the 90s, when investment in production came to a halt. Current prices represent the other end of the cycle, not a "steady march to $105";
3. Physical supply growth of the last 18 months of 6% has been hugely outstripped by the growth in open interest in oil futures (72%) over the same period. Thus the current bubble is financial, nothing else.

if you want to read the interview:
http://www.businessweek.com/bwdaily/dnflash/apr2005/nf20050427_5199.htm

Now, if Mr Evans is right, $30 oil may not be so far away; data released today by the CFTC points to a lot of money leaving oil futures:

[hedge funds and specs] decreased further their net long crude oil futures position to 32,651 vs 59,650 week earlier, i.e. 26,999 contracts from a weak earlier. Net longs have fallen from 88,712 as of week ending 5 April when crude oil hit new contract high at $58.28 on 4 April.

Financial markets have been a bit schizophrenic about the oil rally; initially the fear was that it would cause inflation, as costs rose and workers demanded more money to compensate, and bonds were hit as a result. Somewhere along the way this turned into fears for growth, and bonds rallied as oil rallied.

So, what will lower oil prices mean? Initially, a good slide in prices will remove lingering concerns about inflation, which should allow the Fed to remove some of the more hawkish commentary from speeches etc. This should lift bonds.

However, I firmly believe the Fed is committed to raising rates if they can to 4.5% (my target), and the boost to the feel-good factor from lower oil prices should lift the economy sufficiently to allow the Fed to continue hiking. Bonds have not priced this in, being more inclined to believe in the "soft patch" story. I certainly don't believe in runaway growth, but I do wonder if, strangely, the Fed isn't going to be rescued by oil. Stranger things have happened...