As markets progressively return to their full functioning, now that Good Friday is behind us, and even though Easter Monday means that many international markets are still closed, we are likely to see crude oil continuing its correction to the downside.
Last week, it was the very EIA that came out to say that the persistently mentioned ‘output freeze agreement’ that is supposed to be reached in an OPEC meeting in April will be meaningless, even if it happens. With a current oversupply of oil in the markets, a production freeze would mean that this oversupply would go on pressuring WTI and Brent downwards.
Plus, last week we learned that crude oil inventories have risen substantially – even though Cushing is finally feeling a bit less pressure. Also, the data revealed about oil production starting to lightly diminish is still very far from being enough to have a bullish impact on oil. We also learned that, due to the current massive oil inventories and problems with storage, Russia is planning to increase its sales of oil to Europe even more – which, regardless of production figures, will effectively drown the European markets with cheap oil.
Based on all this, Ridge Capital Markets stands by our latest recommendations. While we are bullish on oil in the long run (we believe that oil will go back to the $100s and more, once a final bottom is in place), but we are bearish on oil in the short-term scenario.
In our view, there are far too many oil companies that are yet to go bust, and current oversupply and storage challenges will keep weighing on oil prices. Also, oil’s impressive recovery from its recent lows has been based not on increased oil demand or decreased oil production, but solely on OPEC ministers’ vague and meaningless statements in order to try and send oil higher, and also on a USD weakness that we also believe has been temporary and is now reverting back to strength.
Having said this, and while we know that OPEC-minister-led headlines may continue to offer some support to oil, Ridge Capital Markets sees the WTI and Brent coming down from their current values. In terms of trading opportunities for forex traders, we believe that going long the USD/NOK or the USD/MXN currency pairs are likely to be profitable investments, since both the NOK and the MXN are oil currencies that are likely to keep suffering from the oil correction and the expectable USD recovery.
After all, the NOK simply cannot go up if oil is going down, as Norway’s government budget and economy depend heavily on oil exports. Plus, even the President of Mexico’s Central Bank has recently stated that this temporary calm in the oil markets, also offered by the USD short-term weakness, is likely to go away soon.
So we believe it’s still time to make a profit by shorting oil currencies until a bottom is in place – at which point we’ll have no doubt in calling an oil and oil currency bullish trend as the move that traders should get behind.