Forget the fact that the ECB leaked 50 billion euros Wednesday, in its desire to be loved it slightly exceeded expectations by announcing Thursday an extra 10 billion euros for good measure. It is obvious that the ECB was underwhelmed with yesterday’s market reaction to their planned stimulus, so they added a bit extra so the markets would receive the measure warmly. The market is indeed giving Mario what he wants. After some indecision, the euro finally moved decidedly lower, which should help eurozone exports, as well as putting more cash in the system to ward of deflation.
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The move up in the dollar that came in response to world currencies gaining value to the euro also reverses oil from higher to lower on the day that ECB head Mario Draghi added a bonus. Mr. Draghi did say that the low oil price strengthened the basis and help the economy as well as increase exports!
“Looking ahead, recent declines in oil prices have strengthened the basis for the economic recovery to gain momentum. Lower oil prices should support households’ real disposable income and corporate profitability. Domestic demand should also be further supported by our monetary policy measures, the ongoing improvements in financial conditions and the progress made in fiscal consolidation and structural reforms. Furthermore, demand for exports should benefit from the global recovery,” Draghi said.
Yet still, slack and unemployment or deflation keeps risks to the downside, and the continued fall in oil prices that he helped with his move today.
But the deciding factor for oil on whether this move will be a success will be measured in oil demand. While the short-term impact will be lower due to currency fluctuation, the big-picture one hopes that this move will increase the demand for oil. That should at some point give oil support and keep us in the recent trading range, where my $44 a barrel support point is looking more solid for a longer-term bottom.
Yet short-term oil will have to get through the Energy Information Administration inventory report. The expectations are for increases across the board, with record readings in both crude oil and gasoline.
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Demand for gasoline will be key, with signals that prices could soon see a national average below $2.00 a gallon. In the meantime, with record drops in oil rig counts and massive job cuts and capital spending cuts the question becomes when will that start to impact U.S. output and supply? We should start seeing the impact by the middle of the summer, but it won’t happen fast enough to slow current production that is adding to our record supply. The American Petroleum Institute was a reminder of that fact when they reported that crude supply increased last week by 5.7 million barrels.
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