Oil (NYMEX:CLZ13) supplies increased for the ninth week in a row against the backdrop of a taper threat from the FOMC minutes and some unconventional monetary thinking in the EU. China disappoints on the manufacturing front, yet demand for petroleum products is the strongest since the economic crisis began. Mixed messages sent oil products higher, but oil continues to be grounded by an ever growing U.S. supply. While crude supply only increased by 40,000 barrels, overall supply at Cushing Oklahoma increased to a whopping 39.9 million barrels.
Now normally that kind of number would have crushed the market if it were not for the fact that the demand for products was so strong. The four-week moving average for demand of all fuels advanced 2.8% last week, the highest since 2008, and the four-week distillate demand spiked 8.8% from a year ago and reaching its highest level since late 2011. Distillate fuel inventories decreased by 4.8 million barrels last week and are near the lower limit of the average range for this time of year.
Gas demand was strong as well. Over the last four weeks, motor gasoline product supplied averaged 9.1 million barrels per day, up by 3.8% from the same period last year. Distillate fuel product supplied averaged 4.2 million barrels per day over the last four weeks, up by 8.8% from the same period last year.
So the products rallied, but crude struggled to come to grips with near record supply. The FOMC minutes as well as some comments put tapering back into the near term equation and if the Fed used product demand as an economic indicator it would be tapering today. Yet it may be action from the EU central bank and magic man Mario Draghi that may really get the market moving.
Bloomberg news reported "The European Central Bank is considering a smaller-than-normal cut in the deposit rate if officials decide to take it negative for the first time, according to two people with knowledge of the debate.
Policy makers would reduce the rate for commercial lenders who park excess cash at the ECB to minus 0.1% from zero, said the people who asked not to be identified because the talks aren't public. It would be the first time the central bank has adjusted interest rates by less than a quarter of a percentage point. The concept, which has been discussed by Governing Council members, doesn't yet have a consensus, the people said. Members of the council, which is holding a mid-month meeting in Frankfurt this week, have said that a negative deposit rate is a potential tool for warding off deflation.”
This action may actually put more pressure on oil and other commodities. As the U.S. looks toward the long road back to a normal trade world, the ECB is descending into the rates abyss. That discrepancy should keep the dollar strong vs. the euro.