22.04.202008:15 Forex Analysis & Reviews: Steep dive: oil market is setting new records again

The oil market is already competing with the coronavirus in the information space. Although these topics are interrelated, the focus of the market has clearly shifted – most experts primarily discuss the fall in oil prices. Commodity currencies like the Canadian dollar are the most affected in the context of the foreign exchange market. The US dollar also did not stay away: the latest trends in the oil market have a beneficial effect on the greenback, as it is again used as a protective tool. The dollar index is still staying above the 100-point value after a temporary decline last week.

Let me remind you that an anti-record was set on the oil market on Monday - the price of WTI May oil futures fell below zero for the first time in the history of exchange trading. Quotes declined to the level of -40 dollars per barrel. None of the traders wanted to buy a contract that expired the next day and required them to take delivery of it. There was no demand for them even when market participants offered to pay extra for the purchase of such futures. Energy companies do not physically have enough space to store oil.

At first, the currency market actually ignored the collapse of WTI May futures – the dollar slightly rose, but only due to general nervousness and the absence of other more or less significant fundamental factors. Moreover, a sharp drop in prices occurred at the time of execution of contracts. But further events forced us to take the situation more seriously. First of all, WTI May futures could not stay in positive territory following a short-term growth – their value went into negative territory again yesterday. June futures also showed a downward trend – their value is hovering around $10-11 at the moment. After WTI, Brent also fell – the price of a barrel of this oil brand reached the level of $18.1 yesterday - this is 30% lower than the value of trade when it closed on Monday and it is also the lowest value since December 2001. The negative dynamics continued today – at the moment, the Brent June futures are trading at the level of $16, and a few hours ago, the price fell below this target – for the first time since 1999.

According to a number of experts, it may soon repeat the fate of the May contract for WTI, collapsing into the negative area. In my opinion, this is an unlikely option, although there are certain prerequisites for implementing this scenario. So, against the background of recent trends, OPEC members decided to hold a video conference today to determine a strategy for overcoming the crisis. However, according to Reuters, Saudi Arabia, Kuwait and the United Arab Emirates will not participate in the online meeting. This fact reduces the significance of this dialogue to zero, since these countries are the largest oil producers. Moreover, some experts believe that oil producers will not be able to reduce production levels to the low that is necessary in order to offset the overall situation

It is also worth recalling that the recently reached OPEC+ agreement was not easy for the cartel's members - in particular, representatives of Mexico even made a demarche and subsequently agreed to participate in the deal only on "favorable" terms. However, this agreement turned out to be ineffective - in general opinion, a ten percent trim in production amid the epidemic and extremely low demand is too insignificant. The supply still exceeds demand, and this situation concerns not only WTI - Americans simply appeared in the forefront of events. The largest oil storage facilities in the US are filled to capacity, oil is stored even in the holds of ships and in railway tanks. Amid a large-scale lockdown, demand for Brent crude oil, which also sets long-term anti-records today, has significantly decreased. At the same time, experts doubt that OPEC+ members will be able to quickly find a way out of this situation. Yesterday's demarche of Saudi Arabia, Kuwait and the UAE served as an additional confirmation of this assumption.

Despite such a fever in the oil market, the foreign exchange market has been relatively calm. The dollar is gradually increasing momentum, and the drop in oil prices primarily affects the dynamics of commodity currencies. For example, the Canadian dollar fell to the 42nd figure against the greenback. After the March rush surrounding the greenback, the USD/CAD pair tried to conquer this price level several times in vain. Today, the bulls of the pair are making another attempt. The closest resistance level is 1.4270 - this is the upper line of the BB indicator, which coincides with the Kijun-sen line on the daily chart) - from current positions, you can consider purchases at this price level.

It should also be noted that data on the growth of Canadian inflation will be released today during the US session. The consumer price index should go into the negative area (on a monthly basis) for the first time since December 2019. Negative dynamics are also expected in annual terms. If the release turns out to be worse than the predicted values, the loonie can not only break through the resistance level of 1.4270, but also test the 43rd figure.