Big euro funding move gives oil markets new confidence

The European Central Bank surprised traders this morning with a bigger-than-expected second round of low-cost loans for cash-strapped euro banks. The results are broadly positive for global growth and we are seeing the first reaction in the oil markets.

Analysts had expected to see the ECB free up only 470 billion euros ($635 bilion) over the next three years, so the final figure of 529.5 billion euros ($714 billion) — approaching the high end of the forecasts — is extremely gratifying.

With so much money on the table, this long-term refinancing operation (LTRO) significantly reduces the threat of a continental credit squeeze.

Traders are seeing the results in the cyclically sensitive crude oil prices, which have curbed their recent downward move and started climbing again.

The LTRO is not all that different from the U.S. versions of quantitative easing, which  should put long-term pressure on the euro much the same way as the first two rounds of U.S. activity pressured the U.S. dollar.

Traders will be focusing on Australian, Canadian and New Zealand currencies today. 

Meanwhile, crude oil prices have followed the bearish engulfing candlestick pattern (daily chart) to the T3 Tilson and are getting their bounce today.

The LTRO effect has stopped the fall and price is inching up slowly in early trading, up $0.38 to $106.93. 

While an improved euro risk outlook should help the global economy and in turn help crude prices, analysts suspect that a lot of speculators are currently being shaken out of the oil market  

Retail traders looking to get into the United States Oil Fund (USO, quote) may want to wait for the morning shakeout. 

As always, if we significant advantage in either direction we will update everyone — but in the meantime you may want to wait and see what shakes out from the overnight news.

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