Canada is one of the major oil producers and exporter in the world. It is also the largest oil exporter to the USA economy compared to other oil exporters.
Due to its strong dependency of its economy on oil exports, it is commonly affected by oil price fluctuations and has always been seen following oil price movements and much affected by the US crude oil inventories.
Its long dependency on oil has made its currency CAD become a commodity currency. This means when prices of oil fall, the currency falls too and when prices of oil rise, the economy grows fast and the currency appreciates.
How crude oil inventories affect the CAD and USD
Like we said before, Canada’s economy strongly depend on oil for its production and growth since it is the largest oil producer and exporter of oil.
The CAD being a commodity currency, it is very sensitive to oil price fluctuations. As prices rise, the CAD follows it and as the prices fall, it is seen doing the same. The two are highly positively correlated.
Secondly, the fact that oil is priced in dollars, also calls our attention to look into it.
When oil prices are high, more of USD will be needed to purchase a few barrels of oil which leads to increased supply of the dollar leading to fall in its value. As the prices of oil increase the CAD becomes expensive thus appreciating in value. So less of the CAD will be needed in exchange of big sums of dollars to purchase oil. this makes oil and USD negatively related. As one rises the other falls.
Now let’s talk about the US crude oil inventories;
The US crude oil inventories are used to measure the change in the number of barrels held in the inventory in the US.
Like we have seen before, Canada is the largest oil provider/exporter to the US compared to other oil exporters, about 85% of its oil goes to the US. This has greatly established a strong relationship between the USD and the CAD.
When oil inventories fall in the US barrels, it shows a shortage in oil which leads to a hike in oil prices. And as oil prices hike the Canadian dollar appreciates over the dollar which means more of the dollar will be required to purchase less of the Canadian oil. This is an advantage to the CAD.
On the other hand, when oil inventories rise more than expected, it means much oil is in stock and this leads to fall in oil prices leading to fall in the value of the CAD compared to the dollar.
How to trade the US crude oil inventories
On data release, when the crude oil inventories is less than expected, it shows a fall in oil barrels in the US stock. This is a sign for a future price increase for petroleum products in the market leading to a hike in oil prices and good future for the CAD. When this happens, sell pairs quoted with the CAD such as USD/CAD,EUR/CAD, GBP/CAD, NZD/CAD, AUD/CAD and buy pairs like CAD/CHF.
USD/CAD should be the first pair to consider because the USD and the CAD are highly affected by oil prices. For this case you would sell the USD/CAD because as oil prices go up the CAD appreciates against the USD.
But if US crude oil inventories shows more than expected instead, sell the CAD and buy USD/CAD instead. As oil prices fall the CAD loses value too. This is because an increase in oil inventories in the US barrels cuts on demand for more oil from Canada to US leading to much oil on the market.
When demand is less than supply prices fall and this is bad for the Canada’s economy.
When trading news on inventories, increase in inventories is bad for CAD and good for the US Dollar while a fall in inventories in the US barrels is bad for the USD and good for the CAD.
Please don’t confuse the oil inventories with oil prices.
Increase in oil inventories in US barrels is a sign for much oil in stock which cuts demand for more oil from Canada to USA making oil cheap on the market , bad for CAD while a fall in oil inventories in US barrels makes oil expensive due to shortage of oil in stock,good for CAD as simple as that.
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