A lot of people have been asking me about the recent OPEC deal and what this means for the price of oil. Let’s break it down for everyone.
On the back of OPEC reaching it’s first deal since mid 2001 Oil has no soared to an 18-month high. What is the OPEC deal you may ask? Well in short, OPEC and non-OPEC countries have agreed to cut output and help combat against oversupply. With non-OPEC Russia leading the way.
Now let’s jump back to your first economics class. If there is an oversupply of something what happens to the price? That’s right it goes down. Now if there is an under supply what happens? Exactly! The price will go up. OPEC is essentially trying to monitor the price on oil and keep countries from coming in and low-balling the rest of the market.
With agreements in place, by even Russia a non-OPEC country, surely everyone will keep their word. Not necessarily, it is hard to say now, but only time will tell.
The way I see it when everyone says they are going to do something it doesn’t necessarily mean they will do it. The market is starting to understand this hence the quick re-tracement in oil last night. Have we already missed the opportunity in the oil trade? Maybe for now, but there is another opportunity that I see unfolding in the USDCAD.
As most of you already know Canada is the largest producer of Oil in North America. Their currency price relays heavily on the price of oil. Stronger oil price, stronger Canadian dollar and vice versa. In the chart below I have overlaid my USDCAD with the price of oil (Oil is inverted to express the relationship directly). There is a very solid support line dating back from mid-2014 with multiple touches. I expect a bounce off this support line around 1.3080 given the FOMC this week as well as uncertainty surrounding the OPEC deal.
Now the long-term could give us a 2nd opportunity here. Say the US raises rates, but comes out with a dovish statement. This will get the dollar on the back foot. Now OPEC compliance starts to fall in line and Oil rallies. A break through the support line around 1.3070 would be the most likely outcome.