UBS On-Air: Paul Donovan Daily Audio 'Oil prices—past, present, and futures'
The desk interprets today's commentary from UBS regarding crude oil prices as indicative of potential volatility in energy markets, particularly affecting currency valuations tied to oil. Per the full note, while crude oil futures have surged to pre-war levels, actual flows remain significantly diminished, underlining a disconnect between speculative futures markets and real-time supply dynamics. Current consumer gasoline prices in the US are notably higher, approximately one-third above pre-war levels, which could have implications for inflation and central bank policy. This backdrop suggests a cautious outlook for currencies sensitive to oil price shifts amid geopolitical tensions.
What the desk is arguing
The desk views UBS's analysis as highlighting a critical imbalance between crude oil futures pricing and actual supply levels. Per the full note, oil refinery operations are based on the real supply that is currently flowing, which is still a fraction of what it used to be pre-war.
Further compounding market concerns, refined gasoline prices in the US remain elevated by about 33% compared to pre-war benchmarks, which may pressure consumer spending and, consequently, broader economic conditions. This scenario presents an intricate dynamic for currencies linked to oil exports and imports.
Where it sits in our coverage
At present, our consensus target for the USD/CAD pair is set at 1.075, with a range spanning from 1.04 to 1.12. Notably, jpmorgan has projected a target of 1.10 for March 2026, while bofa holds a more conservative view with a target at 1.04 for the same tenor.
This perspective on oil pricing diverges somewhat from the broader consensus, given the rising disconnect between oil futures and current market realities. The desk's outlook aligns towards the upper bound of the range, reflecting a heightened sensitivity to oil market fluctuations that may influence currency trading behavior.
How other firms see it
Several firms share a similar bullish outlook on oil prices, emphasizing the potential for sustained upward pressure due to geopolitical factors and supply constraints. This group includes firms like jpmorgan and others with bullish projections on energy markets.
Conversely, bofa holds a more cautious stance, highlighting the risk of oversupply in the market that could lead to corrections in prices. Traders should monitor related energy pairs and potential spillover effects between USD/CAD and broader commodity trends.
What the calendar says
With no high-impact events on the calendar for the upcoming month, the focus remains on market reactions to ongoing geopolitical developments surrounding oil supply chains and the Strait of Hormuz, which may further destabilize pricing.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Crude oil futures are priced at pre-war levels, despite actual supply being significantly lower.
- 02US gasoline prices remain approximately 33% higher than pre-war levels, suggesting inflationary pressures.
- 03The disconnect between futures prices and current supply can lead to significant currency volatility.
- 04No high-impact events are on the calendar to influence market dynamics directly.
Market implications
Traders should watch crude oil spot prices around the $90/bbl mark, as any significant breakout could affect the USD/CAD pair significantly. Heightened geopolitical tensions will also act as a critical variable, particularly in relation to oil supply through the Strait of Hormuz.
Risks to this view
Should geopolitical tensions ease or if there are unexpected increases in oil supply, this may catalyze a price correction that could negatively impact the current bullish stance on oil-related currencies. Additionally, any substantial shifts in the US Federal Reserve's monetary policy in response to inflation could alter market dynamics.
Crude oil futures reached pre-war levels, anticipating future oil flows through the Strait of Hormuz. Current oil flows are only a fraction of pre-war levels, and oil refineries refine actual oil, not hypothetical future oil. Consumer (refined) gasoline prices in the US remain around a third higher than pre-war prices (in the UK, petrol prices are around 10% higher, reflecting different tax structures).
Prices should fall over time, but the potential political cost has provoked the ire of US President Trump.
Sources & References
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