USDCAD pointing to crude oil rally

Had you asked me a few months ago what do I think where oil might go, being quite a vocal bear, I’d say that the only way is down. Even when WTI was breaking above 52.00 USD/bbl level and hedge funds have built a record long position, I was very pessimistic about that and as expected the move was short-lived. But recently I became less bearish. In this post let me present what I see right now..

Everyone is talking about the US shale oil and how it is preventing the market to rebalance despite the recent extension of OPEC cuts. Many also say that the cuts are a joke… There is so much talk about the (over)supply, but very little talk about the demand and even when someone mentions demand it is presented with a very negative connotation.

As I tweeted the other day, it feels that the most crowded trade is the recession/equity market top call right now. In this story also falls crude with so many bearish calls. But what if consensus is wrong and the demands surprises to the upside? What if Iran can’t deliver as much as everyone thinks? What if we get few oil field outages? What if something catches the market wrong footed?

OilPrice.com also published an article saying that Saudis will reduce oil exports to the US. This means we should see the US inventories to reduce significantly.

Just one day after OPEC announced a nine-month extension to its November production cut deal, the top oil official told reporters on Friday that “exports to the U.S. will drop measurably.” Two sources close to the matter told Bloomberg that starting next month, Saudi crude supplies to American importers will be reduced to below one million barrels a day next month – a 15 percent decrease from the monthly average so far in 2017.

Let me switch to charts now. As I’ve been tweeting already, there is close to a record short hedge fund positioning in USDCAD while the hedgers were building a long position in the recent few months. And there is generally better to go with them when the positioning gets extreme.

Let me show you CAD positioning against the price on the next chart.

Positioning itself doesn’t mean anything until the price starts moving against the weaker players/hands. When it does it can become very powerful. Will again the weaker players be the hedge funds with their short CAD positions?

Let me now on the next chart show you WTI and USDCAD side by side. On the upper chart we see WTI price and on the lower one is USDCAD.

We see that USDCAD price can quite often lead the WTI price so we could also treat it as a leading indicator. We also see that WTI is trading just above an important support while USDCAD just below a strong resistance. Can USDCAD break the green trendline and start accelerating lower? Could this also lead to another leg up/rally in the oil price?

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