First the global Macro picture of Oil.

Over the last few years, the major oil producers have been increasing production as new technologies have come online increasing the ability to get it out of the ground. Countries such as Saudi Arabia, Russia, China, Canada, Iraq and of course the US have all been increasing production. This has all driven the cost down.

Russia, Kuwait, Iraq, Iran etc rely on the price of Oil to balance their books. The revenues from Oil is built in to their fiscal budgets; for the US its al about profitability.

The question is which group can survive and sustain the lower oil prices? Can the US companies keep losing money before they fold or will countries like Russia, Kuwait and Iraq have to cut production to bring the price of oil back upto balance their books. Right now it’s who has the deepest pockets.

The economic reasons behind the decline in the oil price are unlikely to go away any time soon, thus even if Opec does cut production, it may not trigger a long-term recovery in oil prices. Weaker demand for oil is one of the key reasons why the oil price has declined. The Energy Information Administration in the US recently cut its 2016 forecasts for the price of oil alongside demand projections for this year.

The slowdown in China is also taking its toll on energy demand and unless the second largest economy pick up quickly which they are not expected to do then demand for oil could remain subdued for some time.

The other factor weighing on the oil price is the stronger dollar. Although the link between the dollar and oil is not straight forward, the IMF suggests that a 1% increase in the dollar triggers a 1.13% decline in the oil price. The dollar’s long-term uptrend could hurt the oil price for the foreseeable future.
Click here to read the relationship between Oil and the US dollar article

Now we want to be able to take that macro picture and turn in to a trading bias with a fundamental, logical and technical approach to make some hansom profits from these global situations, how do you think the banks make all their profits?

The Formulae for Trading Oil and USD/CAD:

The Canadian Economy is dependent on exports and 85% of its exports are going to be to the US and as a result of this the Canadian dollar is greatly affected by how the US consumers react to changes in the price of oil.

  • If U.S. demand rises, manufacturers will need to order more oil to keep up with demand. This can lead to a rise in oil prices which might lead to a fall in USD/CAD
  • If U.S. demand falls, manufacturers may decide to chill out since they don’t need to make more goods. Demand in oil might fall which could hurt

The Canadian Dollar is known as the loonie and is directly co-related with oil. After trading for so long I must say till date CAD is still one of my favourite pairs.

As all of you know Oil is like the 4th means of survival i.e. shelter, clothing & Food. Oil is a major source of energy that runs the Global Economy. Now before I get side tracked, Canada is one of the top oil producers in the world and exports around 2 million barrels per day to the United States which makes it the largest oil supplier to the US!

Now for Traders that might find that as a shock it’s true hence this creates a huge demand of Canadian dollars

Demand for the CAD

  • Oil has a negative correlation with USD/CAD
  • When oil goes up, USD/CAD goes down
  • When oil goes down, USD/CAD goes up

Now we have the fundamental and logical approach to Oil through buying or selling the loonie (USD/CAD). At this point we use the skill of price action trading. There is a misconception that trading is the use of various different technical indicators but nothing could be further from the truth, trading is all about price, price is the king. Once you have learnt how to read the fundamentals, create a bias and the ability to enter using price action strategy; using price without indicators. The fear of theses constant boom and bust scenarios no longer affect you as you can make money on the way up and on the way down.

Let’s now Recap the process

Macro Fundamental View:

Oil will remain under pressure for some time indicating a short bias

Co-relationship between Oil and USD/CAD (Loonie)

Demand for the CAD.

  • Oil has a negative correlation with USD/CAD
  • When oil goes up, USD/CAD goes down
  • When oil goes down, USD/CAD goes up

Directional and logical bias created – Price action and technical view:

Trading Oil

If you approach each of the markets in this manner, not just Oil and USD/CAD you will be on the right side of the market making consistent returns

Have a wonderful day!

Nisha Patel
Platinum Trading Academy

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