Groundhog Day: new month, same misgivings over oil 2Feb16

Groundhog Day: new month, same misgivings over oil

Michael O’Neill

FX Consultant / IFXA Ltd


  • Risk sentiment sours on the soft oil market
  • Doves, hawks and bystanders: central banks diverge on policy
  • Loonie and oil – is it time out in the relationship?

By Michael O’Neill

In Pennsylvania, US and Ontario, Canada, a couple of rural areas celebrate Groundhog Day. Legend has it that if a groundhog sees his shadow on February 2, it means six more weeks of winter.

The contradictory groundhogs are very similar to analysts in the oil market. Photo: iStock

Pennsylvania rodent Punxsutawney Phil did not see his shadow this morning, heralding an early spring. However, 600 kilometres to the north, Ontario groundhog Wiarton Willie saw his shadow. And there you have the groundhog version of markets: long winter/short spring.

The tale of the contradictory rodents is very similar to analysts in the oil market. One group is still looking for lower prices for longer while another group is arguing that we may have seen the bottom.

There isn’t any fresh news to support the bearish contingent although they are still well supported by the fundamentals. Oil inventories in the US and Europe are very high and still rising. Russia’s oil production rose in January and Iran’s production is expected to ramp up very soon. Saudi Arabia has not provided any indication that they are willing to participate in talks about production cuts.

The bullish camp may derive some solace from noted Texas oilman T. Boone Pickens. He said, in a CNBC interview on Monday, that oil hit bottom at $26.15 a barrel and predicted a $52.00/b price by year end.

He supported his view by noting that in November 2014 there were 1609 rigs while last week there were fewer than 500 operating. He also compared the 2016 oil crisis with 1998. In 1998, over-production of oil was 15 million barrels a day. Today, the over-production is only 1.5m barrels per day.

The bulls were also heartened by rumours and reports that Russia and Saudi Arabia were meeting to discuss production cuts.

The WTI technicals are bearish while trading below $34.20/b and looking for another move below $29.20 to extend losses back to $26.15. Intraday, the downside pressure will continue while trading below $31.20. A break above $31.20 suggests additional consolidation within a $$30.35-$32.35 band.

The technical view supports the bearish oil camp and argues that even if the low is indeed $26.15/ b, it may be seen again. At this point, hopes of Opec production reduction agreements are merely fantasy.

US oil one-hour with downtrend and support

Source: Saxo Bank

Doves, hawks, optimists and bystanders

The Bank of Japan (BoJ) is a dove. So is the European Central Bank (ECB). Both are pumping money into their economies in the hopes of stimulating growth. Japan has been a basket case for 20 years and just announced a three-tier interest rate policy with one tier being negative interest rates. Mario Draghi, president of the ECB, already cut interest rates to negative and appears to be promising a deeper cut in March.

The US Federal Reserve is a hawk, although if vice-chair Stanley Fisher’s comments yesterday are to be believed, it is a hawk wearing kid gloves on its talons. He seemed concerned about the implications of the recent market turmoil on the US economy and inflation and suggested that a fall in unemployment below target would be appropriate.

The Reserve Bank of Australia is an optimist. It sees the global economy continuing to grow and acknowledges market uncertainties from diverging central bank policies. It is pleased with the expansion in non-mining parts of the economy and the decline in unemployment.

The Bank of Canada is a bystander. Stephen Poloz essentially admitted that the BoC would be content to await the details of the promised federal government stimulus package.

With the exception of EURUSD, the other three currencies have reacted as they should. USDJPY is higher due to the shift to negative interest rates. AUDUSD has gained over 1.4% in the past week and yesterday’s RBA statement wasn’t a reason to sell the currency. EURUSD is trading like it doesn’t believe that Draghi can deliver what he promised. Traders were disappointed at the stimulus package announced in December and, at this juncture, it appears that they don’t want to get disappointed again.

Bystanding BoC boosts Loonie

The Canadian dollar has gained 1.7% in the past week and over the last day or so seems to have dispensed with the tick-for-tick tracking of WTI price movements. One theory is that if oil has truly found a bottom the intraday fluctuations are merely a noisy consolidation in a $26.15-$34.00/b range. Therefore, the incentive for the BoC to cut interest rates to reduce the effect of low oil prices on growth and inflation is also greatly diminished.

The BoC admitted that policy measures are on hold until it sees the impact of fiscal measures that will be announced by the federal government in April.

The combination of the Bank of Canada being on hold with a greatly reduced risk of an interest rate cut, combined with the prospect of oil prices consolidating within the current range, has served to put a cap on USDCAD for the time being.

– Edited by Susan McDonald

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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