Strong Dollar/Weak Oil Drive Stocks Lower; Likely to Remain in Control Until the Fed Meets on March 18

03/13/2015 5:22 pm EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

A pessimistic monthly report from the IEA and a stronger US dollar caused oil prices to take a hit today, and MoneyShow’s Jim Jubak highlights the reasons this drove US stocks lower and for why next week’s FOMC meeting will be the next event with big potential to move the dollar.

Weaker oil prices and a stronger dollar drove US stocks lower today. It’s likely that they will continue as negatives for US stocks at least through Wednesday’s meeting of the Federal Reserve.

US benchmark West Texas Intermediate crude for April delivery closed down another 4.06% to $45.14. The Brent benchmark was down to $54.57.73, a drop of 4.4%.

A pessimistic monthly report from the International Energy Agency contributed to the fall. Although the agency said that global oil demand bottomed in the second quarter of 2014 and raised its forecast for demand growth in 2015, the increase was a disappointingly modest 75,000 barrels a day. That brought the increase in total daily demand for 2015 to 1 million barrels a day and total demand to an average of 93.5 million barrels a day. Global supply, disappointingly, rose by 1.3 million barrels a day year over year in February to an estimated 94 million barrels a day. The increase in supply was a result of a 1.4 million barrels a day increase in output by non-OPEC producers.

The words in the report were actually more daunting than those figures. "Behind the façade of stability, the rebalancing triggered by the price collapse has yet to run its course, and it might be overly optimistic to expect it to proceed smoothly. Steep drops in the US rig count have been a key driver of the price rebound. Yet US supply so far shows precious little sign of slowing down. Quite to the contrary, it continues to defy expectations. Output estimates for 4Q 2014 North American supply have been revised upwards by a steep 300,000 barrels a day.”

With this context, another drop in the North American rig count didn’t impress the market. The Baker Hughes weekly report showed a 14th consecutive weekly decline with a drop of 56 in the number of working oil rigs to 866. That’s a 46% decline from the October 2014 high. Analysts surveyed by Bloomberg had forecast a drop of 49 rigs.

At some point, a drop in rigs will signal a decline in US oil production. But with oil production still rising despite the lower rig count, we’re clearly not at that point yet.

Oil prices also took a hit from a rising US dollar, not that oil prices needed another negative. The euro was down today to $1.0496 from yesterday’s close at $1.0635.

Reasons?

Continued discord in the EuroZone where tensions between Greece and Germany have hit new high.

A trading bounce from yesterday’s big drop in the dollar, the biggest decline since February 5.

And increasing bets that the euro is headed to parity with the dollar sooner rather than later. I think that’s set up $1.00 as the next support level for the euro and it’s hard to see why the currency would stop short of testing/bouncing at that level.

The Dollar index (DXY) broke through the important 100 resistance level to set a new 12-year high.

The Federal Reserve’s Open Market Committee meets next week on Wednesday, March 18. That will be the next event with big potential to move the dollar.

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