The Shifting Sands of Oil Price and Currency Correlations

Oil prices are heavier today, paring yesterday'utes substantial (~6%) gain.  The conclusion that an increase in Iranian oil exports continues to be several months off at greatest fueled gains.  Citing elevated demand, Saudi Arabia announced a lower discount to its Asian clients next month. 

Other producers expect to match suit.  At the same time, a slowing of US rig shutdowns, inventory develops, and an actual small decline in US output (7 days ending March 27) additionally encouraged ideas that a base in oil prices is being carved out.

Speculative positioning in the futures market (the confirming period through March 31) saw shorts cover almost 18k contracts (each contract is for 1000 barrels).  It was the second largest decline of the year as well as left 289.3k short contracts in speculative hands.  The gross longs added 2.4k contracts to 516k contracts.  Before prices began to plunge last July, the gross longs was at 548k contracts.  They had fallen to almost 400k at the end of November and have been rising since then.  

Genscape, a vital provider of intelligence in the oil sector, reported the other day that oil supplies from Cushing, Oklahoma, which is a key storage facility for the delivery of the futures contracts, fell between March 31 and April Three.  Tomorrow the government (EIA) will release its estimate.  The general opinion expects oil stocks to have risen by 3 mln barrels. Some investment houses are forecasting US inventories as well as production to peak this month.  

US oil stockpiles have increased through an about 86 mln barrels this year to 471 mln.  This has sparked speculation that storage capability is being absorbed.  Rising costs for storage is a key way to allocate the scarcer resource.

There is some risk that the surplus oil output morphs into a excess of gasoline.  US refinery prices may be the highest in a couple of many years at just a little over $28 a barrel.  US refineries are finishing their seasonal maintenance and have added refining capacity.  Apparently, the refiners have been significant purchasers of oil over the past little while. 

The euro inversely correlated with the price of Brent in the Nov-Jan period (60-day rolling basis on percent change).  Nevertheless, it turned positive and trended higher to briefly increase through 0.40 in the third week of March (two-year high), and currently is all about 0.37.  Oil and also the euro tend to be positive linked.  It is not only that oil costs and trades in bucks (for the most part), but it is also due to the ECB's reaction function.  It targets headline inflation, frequently driven by oil costs.  It raised rates in 2008 and 2011 as oil prices appreciated whilst Eurozone inflation was increasing.

The Norwegian krone is sensitive to swings in oil prices.  There is a positive relationship between the percent change in the actual krone and the percent change in the cost of Brent.  Over the past 60-days, the correlation is actually near 0.52.  This is the highest since late This year.  Last year, from March through early October, a negative correlation existed for the first time in more than the usual decade.

The Canadian dollar is also sensitive to the changes in essential oil prices.  The correlation reached a 2-year high at the end of last year near 0.67.  This now stands just below 0.55.  There was an inverse relationship for nearly the H1 14, the first time in three years.  Bank of Canada officials warned that the impact of falling essential oil prices extends outside the essential oil patch.  The Bank of North america surprised the markets, cut rates in January, and could feel compelled to cut rates again, perhaps as early as this month.

The correlation of the % change in the Mexican peso (against the US dollar) and the percent change in oil is not as strong as one might expect.  The 60-day rolling correlation stands close to 0.45 now.  This is essentially two-year highs.  The relationship briefly inverted last April/May and some weeks in August.

Oil Travails is republished with permission from Marc to Market