The price of oil is on a tear higher as 2021 begins. WTI crude oil price settled yesterday above $53 and the prospects for the year suggest an even tighter oil market. However, one wild card remains to be explored – the Iran potential supply.
Saudi Arabia surprised everybody at the start of this year as it announced unilateral oil cuts, on top of the oil cuts expected from the OPEC+ group.
What to Keep An Eye On When Trading Oil and the Canadian Dollar (CAD)
All traders are aware of the direct correlation between the price of oil and the Canadian dollar (CAD). As such, any news important enough to move the oil market is good enough to move the CAD pairs.
This year, oil and CAD traders should keep an eye on – the United States, Iran, China, and the trends in green energy. Let us have a few words on each.
First, the United States. Despite most traders focusing on OPEC and Saudi Arabia, as of 2019 the United States is the world’s largest oil producer. The Permian basin has plenty of resources and the shale oil industry expanded at an incredible pace. One thing is worth mentioning here – the United States is the world’s top producer and also the top consumer as measured by terawatt-hour (TWh) equivalents per year. Therefore, everything on the price of oil matters not only for the CAD, but also for the U.S. dollar (USD).
Second, Iran is the wild card for the 2021 oil market. Depending on the new U.S. administration’s foreign policy, the oil market may quickly find itself oversupplied, despite the OPEC+ and individual countries’ other cuts. If the U.S. chooses to get back to the Iranian deal, we may see the sanctions removed and suddenly 1.5-2 million barrels of oil per day are back on the market. This alone is enough to shift the price of oil, and thus generate extensive volatility on the currency market.
Third, China remains a key player in the oil market. The first two largest state-own companies (Sinopec Group and China National Petroleum Corporation – CNPC) have a big saying in the world’s oil market. For example, Sinopec, a company in which the Chinese state owns almost 70% of the shares, is the world’s largest oil company by revenue. It recently (2017) expanded in Africa, by acquiring three-quarters of Chevron’s South African assets. CNPC complements Sinopec’s activities, by owning almost 60 miles of pipelines in China and operating in more than thirty countries in the world. Giving the renewed tensions between the U.S. and China, one should be prepared for the battle to move from trade and telecom to oil as well.
Finally, green energy. The recent efforts from the developed economies are remarkable, but the reality tells us that fossil fuels remain the main source of electricity. Oil remains the largest energy source in the world today, in particular in the transport sector. A meaningful change in green energy trends, might weigh on the price of oil in the year ahead.