NOK, CAD: Its All about Oil? - Rabobank

NOK, CAD: Its All about Oil? - Rabobank

17 May 2016, 17:31
Roberto Jacobs
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NOK, CAD: Its All about Oil? - Rabobank

Jane Foley, Research Analyst at Rabobank, notes that yesterday Nigerian oil Minister Emmanuel Ibe Kachikwu reportedly stated that the country’s oil production had fallen by almost 40% to 1.4 b/d due to militant attacks on facilities in the Delta region.

Key Quotes

“This is the lowest output for over 20 years. The attacks are said to be part of a campaign by the Niger Delta Avengers who are demanded a greater share of oil profits and independence for their poverty ridden region. The social and political motives behind the attacks suggest there is unlikely to be a quick fix solution to the problem.

The news coincides with a report from the US Energy Information Authority stating that oil production from seven major US Shale facilities is expected to drop by 113K b/d to 4.96 mln b/d in June and May. This comes on top of concerns that electricity blackouts and shortened working weeks will continue to hamper the production of oil in Venezuela. The Amuay oil refinery has a capacity to produce 645K b/d but it is reportedly only producing half of that currently. Also weighing on global oil output are the wild fires in Canada. Alberta has now put all oil sands facilities north of Fort McMurray and south of Fort McKay under a mandatory evacuation order. Some of the displaced oil workers had just returned to work after a previous week-long shut-down caused by the disaster.

Just as fears of oversupply in oil are ebbing, the EIA last week released its Outlook suggesting that there is potential for an upward revision to its 2016 demand projections given higher than expected growth of 1.4m b/d in Q1. India alone accounted for nearly 30% of the Q1 global increase in demand for oil in a trend which could continue into Q2 and beyond. The Indian economy grew 7.6% in the year to March 31 2016. Although the Finance Ministry has forecast a growth rate between 7% and 7.75% this year, the WSJ yesterday reported a projection of about 8% from a government official.

The perception that excess levels of global oil supply are being reduced has this week propelled Brent crude futures back to levels last traded in November 2015. Consistent with the better tone of oil, the NOK has been the best performing G10 currency on a 5 day view. Although the CAD has held in well, its performance has been impacted by uncertainty connected with the economic impact of the wildfires.

Last week the Norges Bank left rates unchanged as expected. Although the central bank has retained a loosening policy bias since March, it stated that this year’s upward trajectory in oil prices “may reduce uncertainty and contribute to somewhat higher growth in the Norwegian economy”. This risk is supported by the expansionary fiscal policy as the government dips into its USD860 bln wealth fund to protect the economy from some of the pain caused by the previous falls in the price of its oil exports. In its revised 2016 budget published last week the government confirmed it would provide more stimulus by spending NOK 205.6 bln of its wealth fund up from the NOK195.2 bln it estimated in October. Given that CPI inflation in Norway at 3.2% y/y remains elevated, the market is likely to continue to unwinding expectations for further Norges Bank rate cuts this year. On the back of these developments we have revised higher our forecasts for the NOK and now look for a move towards EUR/NOK9.15 on a 3 mth view.

In view of economic cost of Canada’s wildfires we would expect the NOK/CAD to be bias higher near-term. That said, given the scope for a bounce back in Canadian growth and oil output Q3, at this stage it is too early to assume that there will be a prolonged drag on the CAD. A boost to growth from a rebuild suggests risk for a stronger CAD later this year. That said we will delayed revising up our CAD forecasts until the impact of the wildfires becomes clearer.”


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