I remain bearish on commodities: improving demand will not yet cover a supply glut. Oil is in a loop where higher prices trigger higher production that sends prices swiftly lower.
The CAD economic outlook remains highly influenced by oil prices – as they decline, USD/CAD has room to appreciate. Especially considering that USA T-bill 2-yr yields are elevated at 1.708% with limited expectations of inflationary spill-over. Soft oil, higher US yields and leveraged funds trimming long CAD position will pressure USD/CAD back to 1.30 resistance.
Commodities outperformed in the last quarter with metals up 10% and energy up 12%, driven by demand, weather and OPEC supply limits. In 2018 oversupply and slow demand growth will curtail any significant jump in prices.
OPEC is likely to make supply cuts at the end of November, but this will have only a marginal effect. Last week, U.S. Energy Information Administration reported that crude inventories rose by 1.9 million barrels in the week ended 10 November, well above expectations of 1.4 million. US shale producers have increased output, buoying domestic production to a record weekly high of 9.645 million. This renews speculation of a supply glut.