Oil Prices Still Rising Against Dollar Strength

Published date: 09/10/2018

Commodities have all taken a hit off the back of USD strength in recent months - with the notable exception of Oil.  As the lifeblood of manufacturing, higher USD levels have naturally had little, if any impact on this crucial necessity. Countries such as Germany and Japan are huge importers of Oil, and large fluctuations in price can materially influence producer and end consumer prices accordingly. The US and Russia also import Oil, as domestic production does not cover overall consumption 'at home'.  

However, Oil markets are significantly comprised of speculative traders, with less than 10% of trade in all manner of contracts said to be on the back of physical exposure levels. No surprise then that when prices move erratically, central bankers tend to look through their impact on inflation, which as we all know, plays a fundamental part in determining monetary policy in individual countries. 

In recent years, we have seen a concerted effort to reduce output in order to get prices back to more recognisable levels, having fallen sharply over late 2015 and early 2016. At that time, risk sentiment deteriorated in the stock markets and at a time when production was high, leading to overstocked inventories. Prices in the leading WTI (West Texas Intermediate) - which is the benchmark for Oil prices - fell below $30.0, so OPEC and other major oil-producing nations gathered together to agree to output cuts which slowly although surely lifted prices to where we are now.  

Throughout this time, various episodes of output disruption and resolution have led to wild swings in price - again, reflective of the heavy speculative element of this market. More recently, Iran, who is a major producer of Oil, has been hit with sanctions from the US - the US insisting any country dealing with Iran will be similarly dealt with through sanctions and/or tariffs.  Iranian supply is, therefore, a net drain on global supply and prices are on the rise again.  

When applying the movement of Oil prices to the FX market, the CAD is the currency everyone tends to focus on given Canada is the 7th largest producer of Oil - indeed, supplying the US with vast quantities. As one of the major currencies in the world, the correlation with Oil is high, largely as a function of liquidity in that currency, as opposed to Saudi Arabia and Russia, whose currencies offer less confidence in the market due to a variety of political and economic factors affecting its attractiveness as an Oil proxy.

In the chart attached to the article, I have decided to show you the weekly on a long-term scale. This is for some of you who cannot remember the time when WTI reached $147/bbl. There is now a massive level coming up at the $78-9/bbl area that needs to be watched carefully and any breakthrough would be seen as a very bullish signal. 



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