After failing to go well past $40 in its relief rally, crude oil is stuck between a rock and a hard place. On the one hand, OPEC ministers keep promising a meeting that they refer to as if it were the miracle that oil needs to go beyond this level (which it reached only based on OPEC ministers' statements). On the other hand, even the pointless objective of reaching a production freeze agreement at that meeting (which, at current production levels, would mean nothing good for oil) are crumbling.
To help in this equation, according to the latest figures of oil inventories, while a big draw in Cushing has been seen, there has a been a general and very substantial rise in inventories. Actually, the second biggest weekly rise in one year.
So there is an oversupply of oil in the markets, which, even if its production goes to freeze mode (which looks more like a hollow promise for traders to buy the rumor and sell the news), will go on exceeding demand. Oil inventories go on rising and storage goes on being a heavy concern. The relief rally has run its course. Oil went up by 50% in a matter of only a few weeks, all based on the OPEC ministers’ endless statements, and now it’s time for fundamentals to come back in and run the show.
At the same time, every day another Fed board member is coming out in support of another rate hike, which some say could even come as early as April. Today, Chicago Fed President Evans speaks, which may bring another moment in support of the Fed’s rate hike journey. This is one other aspect that can send oil down in dollar terms, as the USD may find support to make a stronger recovery from its recent lows.
At Ridge Capital Markets, we believe that markets are ultimately based on technical and fundamental factors – and that the noise of political statements and hopes only has temporary effects. That is why we are again recommending an oil short as a profitable market play.
In terms of forex markets, we believe that going long the USD/NOK or the USD/CAD currency pairs is a very likely profitable forex trade, betting on the rise of the USD based on the Fed’s audible support to its rate hike path – and, more than that, betting on the dependence of Norway and Canada on oil for economies and budgets.
If oil does come down from its current levels, the NOK and the CAD are likely to feel the correlated market pain, and the USD will begin to heal from its wounds – and that’s a way for forex markets to profitably play the currency effects of an oil correction and a USD recovery.