Oil Slumps in Early Trade

NEW YORK (DTN) -- New York Mercantile Exchange oil futures slumped Thursday morning on the back of a strengthening dollar, technical pressure and excess crude oil supplies.

The downside reversal comes a day after the marker rallied on strong demand that helped drawdown gasoline inventories. The dollar's rally today to a one-week high versus the euro and other peer currencies followed a stimulus announcement by the European Central Bank.

The market remains volatile as it struggles with ongoing excess crude supply and uncertainty over whether the Organization of Petroleum Exporting Countries would rein in production.

Thursday morning, NYMEX April West Texas Intermediate crude futures fell 8 cents to $38.21 barrel and has accelerated to the downside since. WTI futures rallied above resistance at $38.21, the 33% retracement of the previous downtrend to a $38.51 three-month high on Wednesday, although overbought pressure hints at a possible short-term downtrend. The May Brent crude futures contract on the IntercontinentalExchange declined 42 cents to $40.65 bbl.

In products trade, NYMEX April ULSD futures eased 0.57 cents to $1.2270 gallon. April RBOB futures contract slipped 1.21 cents to $1.4584 gallon, off a $1.4806 better than six-month high on the spot continuation chart.

On Wall Street, U.S. stock indices were higher following the ECB action, saying it would expand its asset purchase program from the current 60 billion euros a month to 80 billion euros, and will start buying corporate debt on top of treasuries that it currently buys. The ECB also cut deposit rates, marginal lending rates and refinancing rates to zero.

At his news conference, ECB President Mario Draghi said the action was taken because financial conditions have tightened and the global economic growth has weakened. But he also said that he doesn't anticipate further rate cuts going forward.

Rates will remain low for a long time, he added, and Thursday's action will likely make it easier for banks to increase lending and boost the region's economy. He said there would have been deflation if the ECB had not acted.

This expansionary fiscal policy adds liquidity to the market, which bodes well for oil demand.

Analysts said this is a bigger stimulus package than the market expected spurring a rally in the broader equities market, but one analyst said the moves only benefit the wealthy and does nothing to solve euro-zone's economic problems. The euro fell 1% versus the dollar following the announcement.

Aside from the ECB's action, the oil futures complex eased after encountering resistance. Technical charts are indicating overbought market conditions for NYMEX West Texas Intermediate, NYMEX ULSD and ICE Brent.

On Wednesday, the Energy Information Administration reported a more than expected 3.9 million bbl crude supply build during the week-ended March 4 to 521.9 million bbl, 16.3% higher than year prior levels and a new weekly high.

George Orwel can be reached at george.orwel@telventdtn.com