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.”
