Oil’s last dance, Oil-linked currencies soften, and Mexico’s surprise bank cut

All hell is breaking loose in oil markets.  Yesterday’s historic selloff with the WTI May futures contract was a technical situation that did not have same whopping impact today’s rout is having on the entire overall curve and across all asset classes.  Today’s extreme selling spiraled even lower after the Texas Railroad Commission (oil regulator) was split on limiting oil output and delayed any vote on curtailing output until May 5 at the earliest. 

OPEC also reportedly was trying to have a conference call, but Saudi Arabia, Kuwait and UAE were expected to not take part.  The speculation was that OPEC could hold a meeting on May 10th to discuss deeper production cuts.

Oil prices are collapsing because no one wants to be the first one on the production cut dance floor.   Texas punted their decision and with OPEC not showing any urgency, that pretty much means the world will run out of room to store oil by the second week of May. 

This will be oil’s last dance for many US producers as the Trump administration efforts to save the shale industry will fall short.  Filling up the strategic reserves or tariffs on Saudi oil won’t cut it and President Trump will see strong resistance from Congress in giving out any funds to oil and gas companies.  North America shale-oil producers will be forced to shut-in very soon and most of the smaller players will not be able to survive this low-price and dismal demand environment. 

Oil price volatility will remain on high and now that single digits were already reached with the June WTI crude contract, there should be no surprises if we see prices turn negative at one point over the next several sessions. 

Oil curtailment will happen across the industry as the demand devastation from COVID-19 has made producers scramble to find places to store crude.  The July WTI crude contract is down 22%, but still above the $20 a barrel and that should serve as a reminder prices will sooner or later stabilize as production cuts seem like they will happen the hard and uncoordinated way. 

FX

Oil-linked currencies are all lower on the day, with the Russian ruble and Norwegian krone leading the decline.  The Canadian dollar remains stubbornly strong to most of its trading partners, but that trend might not last.  The loonie’s outperformance might be short-lived as Canada’s economic rebound should be more protracted than anticipated.  Economic activity will not have a sharp rebound as rising Canadian household debt and a struggling oil and gas sector will remain permanent headaches for the remainder of the year. 

Mexico

Mexico’s central bank delivered a surprise overnight rate cut as they play catch up with the rest of the world.  The peso was already down on the day when the Banxico cut rates and announced additional measures to improve liquidity.  The overnight rate was lowered by 50 bps to 6.00%, definitely not enough to get anyone excited. 

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Ed Moya

Ed Moya

Senior Market Analyst - The Americas at OANDA
With more than 20 years’ trading experience, Ed Moya is a market analyst with OANDA, producing up-to-the-minute fundamental analysis of geopolitical events and monetary policies around the world. Over the course of his career, he has worked with some of the world’s leading forex brokerages and research departments including Global Forex Trading, FX Solutions and Trading Advantage. Most recently he worked with TradeTheNews.com, where he provided market analysis on economic data and corporate news. Based in New York, Ed is a regular guest on several major financial television networks including BNN, CNBC and Bloomberg, and is often quoted in leading publications including the Wall Street Journal and the Washington Post. He holds a BA in Economics from Rutgers University.
Ed Moya