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.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's six o'clock in the morning London time on Thursday the 25th of June. Crude oil futures have fallen to pre-war levels, but this does not, of course, mean that current consumer prices for fuel products will be at pre-war levels.
A lesson that US President Trump seems to be discovering the hard way. While expectations for the future flow of oil through the Strait of Hormuz are driving down futures prices, the actual amount flowing remains only a proportion of pre-war levels. Oil refineries operate using actual oil supplies.
It is not possible to refine a hypothetical future supply of oil. This is why US gasoline prices are about a third higher than their pre-war levels. In the UK, petrol prices are about 10% above pre-war levels, but that simply reflects the different taxation structures for oil in the two countries.
Trump clearly appreciates the political damage that comes from this situation. Even Republicans are blaming the President for the cost of living in the United States today. But there are alternative explanations to Trump's suggestion of price gouging.
As US President Biden found, even if there are justifiable accusations of profit-led inflation, voters will still be inclined to blame the President for failing to prevent or reverse that. The US consumer is very much in focus today with May income and spending data. There's no reason to suppose that US consumers will have been anything other than resilient in their spending behaviour again.
The war has not created significant disruption to consumer spending in the major advanced economies because US consumers, amongst others, have clung by their fingernails to the standards of living they've been experiencing in recent years, even as real income growth in the States has turned negative. The mechanism, reducing savings rates, has endured because consumers were actually in quite a strong position before the tariffs and war took their toll on US spending power. However, it is probably fair to say that the aftermath of the war and the tariffs is a consumer that is more fragile than they would otherwise be, and any future economic shocks would potentially create a greater US economic vulnerability.
We also get revised US GDP data, which matters a bit to economists, but is not likely to be majorly significant as an event for financial markets. May durable goods orders data is also of some interest. What is called investing in artificial intelligence is obviously still attracting a great deal of attention, although US durable goods only form a relatively small part of the AI spending story in the United States.
Europe is offering nothing very much on the data front, but it is offering more ECB speakers and the ECB Bulletin. It's always nice to hear from central bankers, and today's roster includes ECB Chief Economist Lane, whose remarks should be heard with the quiet reverence that all chief economists deserve. But one does perhaps have to question whether there can be too much of a good thing.
Today's round of speeches brings to 14 the number of appearances we've had from ECB members this week. That's all for today. Have a good day.
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