The Organization of Petroleum Exporting Countries, or what we'd like to call "The Black Crack Mafia," had a mob meeting last week to discuss the fate of the energy markets. This 12-member cartel of oil-producing nations plays an extremely significant role in determining oil supply and prices, so we better pay attention to what they have to say. Capiche?
In their December meeting, the Organization of Petroleum Exporting Countries (OPEC) all agreed that demand for oil would most likely weaken next year because of the fragile economic recovery. Because of poor demand and threats to the global economy (ahem, euro zone debt woes!), they expect oil prices to sink to $70 per barrel. They figured that $70 per barrel is as low as oil prices can go because there is enough demand from China, which is buying up oil to build its reserves.
Still, the prospect of low oil prices didn't sit too well with the members of the Black Crack Mafia. After all, they cater to roughly 40% of the world's black crack needs so lower oil prices would definitely hurt their profits. Instead, they insisted that oil should trade around $90 to $100 since they still have a lot of spare capacity.
Silly Forex Gump! This is a forex trading website, what does oil have to do with the currency markets?!? Patience, young padawan...
The most notable direct connection that oil has to the currency markets is its relationship with the Canadian dollar. In case you skipped the School of Pipsology lesson on oil correlations, let me give you a short backgrounder.
Canada is one of the world's largest oil producers. Actually, oil is so important to Canada's export-oriented economy that it accounts for about 12% of its total exports. That being the case, we can see why its economy and its currency stand to benefit from higher oil prices.
You should also know that the U.S., which is the world's biggest black crackhead, gets most of its black crack from Canada. Being just a stone's throw away has made Canada the U.S.'s number one "dealer."
To buy oil from Canada, the U.S. often needs to exchange huge sums of U.S. dollars for Canadian dollars. Basically, the U.S. has to short USD/CAD when it's in need of a black crack fix. This explains why we often see USD/CAD fall when an increase in demand for oil causes oil prices to pick up.
Now, let's take a look at USD/CAD and see how this could play out.
In April, USD/CAD hit parity as the price of black crack reached its highest level in 18 months at $86.84. With the Black Crack Mafia pushing for oil to hit the $90 to $100 level, you need to keep a very close eye on parity, which is a major support level for USD/CAD. A break in that level could finally send USD/CAD tumbling down to .9500!