Yesterday's collapse of oil to a seven-month low clearly punctuates the demise of OPEC in our view. The thin veil of control that markets provided to this dysfunctional committee is no longer. Overhyped production cuts that never really decreased OPEC supply or pushed prices higher, highlighted the group’s ineffectiveness in modern energy markets.
We don’t expect a rapid recovery in oil prices as the weakness remains due to an uncontrollable supply glut over expectations of a global growth slowdown, which is misplaced. Barring a significant event that drains inventory levels, we don’t expect oil prices to climb above $55 this year. In the FX markets, oil-linked currencies have come under heavy selling pressure. Most vulnerable is USDRUB which is nearing its 200d MA around 60.
The fall in oil prices, worries about US-Russia relations and potential for further sanctions along with long RUB positioning and the central bank cutting interest rates suggests a negative outlook for RUB. While CAD sensitivity to crude volatility has declined, the central bank's sudden hawkish rhetoric has focused investors' thinking on monetary policy expectations meaning we could see a reversion of primary driver back to commodities. In addition, the fall in oil will damage outlook for growth and inflation forcing the BoC to reconsider hawkish comments.
By Peter Rosenstreich
