Commodities Outlook: Return of the New Oil Order
Lead — The resurgence of US shale production, driven by new pipeline capacities, is reshaping the oil landscape into what Goldman Sachs refers to as the 'New Oil Order.' This is significant for FX traders, as the dynamics of oil can directly influence currencies tied to commodity exports. Per the full note from Goldman Sachs, emerging supply from the Permian Basin will stabilize pricing while also encouraging faster cycles in production efficiency.
What the desk is arguing
The desk posits that the increasing output from US shale due to enhanced pipeline infrastructure represents a pivotal shift in the oil market dynamics. This view aligns with insights from Goldman Sachs, emphasizing how the new supply potential from the Permian Basin is re-establishing a lower-cost production paradigm.
Supporting this narrative, Jeff Currie highlights that as spot prices rebound, US shale growth will play a crucial role. With pipeline capacities increasing, the supply from the Permian Basin is anticipated to push market operations toward a more flexible, cost-effective model.
Where it sits in our coverage
Our consensus target for the USD/CAD exchange rate stands at 1.075, within a range of 1.04 to 1.12. Key firms include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This outlook suggests that our view is slightly more optimistic than Bank of America's, which projects a lower bound at 1.04. Notably, our target lies near the upper range, indicating a bullish sentiment among our strategists.
How other firms see it
Several institutions, including jpmorgan, align with this optimistic stance on the potential for US shale to impact the oil markets positively. On the contrary, bofa argues for a more cautious approach, with their target reflecting concerns surrounding the sustainability of high oil prices.
Traders should closely monitor oil price trends and production data, as they are likely to affect related pairs such as USD/CAD, especially with respect to commodity-linked currencies dependent on oil pricing dynamics.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US shale production is rising rapidly, supported by new pipeline capacity.
- 02Goldman Sachs identifies a transformation into a fast-cycle, lower-cost oil market.
- 03The USD/CAD pair is likely to be influenced by shifting oil prices.
- 04Our outlook leans towards a higher target compared to some peers.
Market implications
Watch for key shifts in oil supply dynamics as they could influence the USD/CAD exchange rate. A breach above 1.075 could reinforce bullish positioning, while fluctuations in oil prices may present trading opportunities.
Risks to this view
Key risks include a sudden downturn in oil prices or a geopolitical event that destabilizes oil supply. Such developments could necessitate a reassessment of our bullish stance on the USD/CAD pair.
Making a comeback alongside higher spot prices this year will be the rapid growth in US shale, says Jeff Currie, with new pipeline capacity unlocking supply from the Permian Basin and re-anchoring the market around a fast-cycle, lower-cost New Oil Order. This podcast was recorded on January 10, 2019. All price references and market forecasts correspond to the date of this recording.
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