While oil prices were hit hard after the European Central Bank (ECB) changed to rules on their Quantitative Easing (QE) program, the market is coming back on signs that the U.S. oil surplus could be abating. The American Petroleum Institute's subscribers-only report showed that U.S. crude supply fell by 5.2 million barrels--much more than expected. Oil supply in Cushing, Oklahoma also fell by a whopping 1.7 million barrels, which, according to previous bearish forecasts, just was not supposed to happen. Oil bears have talked about supply overflowing storage, but obviously with a drawdown of this magnitude, that is not going to happen any time soon.
Now with the ECB supposedly front loading QE over the next few months, the demand for oil should rise. Sure, in the short term, oil will have to overcome the dollar strength but the demand surge should overtake that at some point. On top of that the market has to be on guard that this so-called QE front load may be just a head fake to add more QE in the future. The ECB may be worried that with the recent strength in the euro some of the positive effects of QE might be muted so they may have to do more to fight off deflationary pressures. They want to keep that competitive edge that they had on the dollar to get the most banks for their freshly printed euro currency.
Strong U.S. new homes and building permits added to the dollar strength even more bringing down almost all of the commodities. Even natural gas got hit as weather and a falling oil price weighed to the recent market enthusiasm.
Today oil will take its cue from the Energy Information Administration supply report but also from the Fed minutes later is the session. The market will want to see what the Fed is thinking and if it is perceived that the Fed is leaning toward a rate rise then the dollar will rock and oil may suffer.
Yet even with the oil market recent weakness. this market has come a long way over the last few weeks. With some traders lightening up ahead of the Memorial Day weekend, we could see some wild swings, but as we have said that over time rig count cuts and billions of dollars in Cap x cuts will take their toll as the surplus of today will be the tight market tomorrow. The world may be awash in oil today, but the world is also awash in cheap money, and cheap money loves oil!
America also loves to drive! AAA predicts a near-record 37 million Americans are expected drive this weekend! Go Gas up!