Supply Problems: The ECB and Oil

Traders in the euro and oil market are faced with two very different supply questions. Trading was solid Wednesday despite holidays as the pound led the way on jobs data while the US dollar lagged. Australian jobs numbers are due later. A new AUD long trade with 4 charts have been issued ahead of the Aussie jobs report, due 30 mins from now. A new GBPJPY note has also been issued on the existing trade.

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The Eurozone supply problem is bonds. A report Wed revealed the ECB is looking into municipal bonds in order to expand QE. At first blush more QE sounds like a euro negative and that was the kneejerk in the market as EUR/USD fell near 1.0700. But deeper analysis highlights a problem: If the ECB is digging around the muni market, then it can't find enough bonds to buy.

We highlighted a leak earlier this week saying expanding ECB QE could be hard because of the lack of bond supply. Examining munis looks like a desperation move and the euro has recovered to 1.0758.

Overall, the case for the euro is still tenuous. Even if the ECB can't find enough bonds to satisfy the market's hopes for an additional 15 billion/month for at least 6 more months, then the ECB may take additional steps elsewhere to balance it out.

The oil supply problem is more straightforward. In some commodities, a bit of extra supply can be easily put into storage. Miners can stockpile and defer profits. Oil is different. Storing crude is difficult , costly and it is difficult to build storage facilities.

Still, there is tremendous infrastructure to maintain strategic reserves and commercial stocks. But it's not unlimited and with supplies continuing to grow far faster than demand, a breaking point is near. According to the EIA, global production at the moment is 95.48 mbpd; demand is 93.86 mbpd. That means every day nearly 1.4 million barrels of oil need to find storage.

Iran alone wants to double exports to 2.3 mbpd from 1.2 mbpd.

The latest API figures showed another 6 million barrels going into US storage last week. Shale production hasn't fallen off the way many analysts through it would.

Eventually, the oil will simply flood the market. Demand is largely inelastic for oil so there will be very little support for crude. We may be seeing the beginnings of another decline at the moment as Brent fell to the lowest since Aug on Wed.

In FX, the Australian dollar is the near-term focus. At 0030 GMT, October employment data is due and expected to show a 15.0K increase after a 5.1K decline in Sept. Unemployment is forecast at 6.2%. In the event of a disappointing report, there is very little support until 0.6950/6900.