In 2018, the crude oil balance will likely tighten and inventories draw, on a likely 9-month extension of the OPEC-Russia accord and amid continued firm demand growth. The speed at which US shale responds will help determine whether crude hugs the top of the recent range near $62.50/bbl (central scenario) or shifts to a higher range that sees prices sustaining in the mid-60s (high price scenario).
While Crude prices stabilized near multi-months highs on today, even as the supply cut efforts by global oil producers continued to cushion the energy commodity.
In energy, as a result of index rebalancing, we see crude oil and petroleum products in general likely having to be sold from current levels. In regards to the S&P GSCI specifically, WTI purchasing (~10,000 contracts) will likely outweigh Brent selling (~6,000 contracts), however, nearly 8,000 contracts of Brent will likely also have to be sold from the BCOM rebalance, bringing the combined selling total to over 13,500 contracts. Yet, as far as price pressure is concerned, we see a limited impact for Brent as the total contracts that need to be sold only amount to 0.6% of total aggregated Brent open interest (OI). For WTI, the likely increase in contracts only represents 0.4% of total WTI OI, would imply that the pricing impact will also likely be quite limited.
An oil price breakout into a higher range is most meaningful for those currencies where output gaps have already closed and the central bank is normalizing. Among petro currencies, CAD fits this description, and we pair a long here versus AUD, where iron ore has de-correlated with the broader commodity complex, where AUD itself has de-correlated from commodity prices, and where RBA is expected to remain on the sidelines.
Long a 6m 0.9450-0.9120 AUD put/CAD call spread. Paid 0.74%November 21. Marked at 0.37%.
We advocate buying USDCAD 1m debit put spreads using strikes 1.2925/1.2150 (at spot ref: 1.2520).
Aggressive bears, deploy 1m USDCAD ATM -0.49 delta puts as CAD rates recently climbed above USD rates for the first time since 2014, and our USD rates projections can realistically drag the USDCAD to 1.20.