Energy traders would have noticed the somewhat eery price action on oil prices recently. I believe that recently losses are attributed to:
- Emerging doubts over the degree of compliance with OPEC production cuts as Iraqi exports remain high;
- Concerns about the rate of market rebalancing;
- Rapid rebound in U.S. shale production following a report at the end of last week which showed another solid build in US rig count (risen for the tenth consecutive week) - I expressed my concerns about this in the related USD/NOK idea.
Reports that non-OPEC producers Russia and Kazakhstan had reduced output produced little positive price reaction.
In essence, there is a battle between two major market dynamics: OPEC cutting (and adhering to cuts) and addition of supply by US shale producers.
One thing is for certain though: currently /cl price action does not look promising. USD/CAD is the best way to play near term oil downside in my opinion.
USDCAD has been moving in the visible channel since May 2016 and is currently sitting on the lower . CAD looks very expensive currently; the US-Canada 2YR swap spread suggests that USDCAD should be trading much higher indeed.
Markets have been ignoring the risk of US protectionism for CAD; although CAD isn't as exposed to the risk as some other currencies (AUD, for example), the BoC's business outlook survey showed that some respondents are concerned about the uncertainty associated w/ rising protectionism and I do not think that the risk should be discounted so much, since a potential shift from selective tariffs to broad border tax could be significant for US-Canada trade.
Risk:reward, technicals and fundamentals all favour buying the dip on USDCAD , targeting 1.37000.