rahul.khanna's picture

Oil outlook and the currencies affected

Currencies gaining the most from the recent steady rise in crude oil prices are also the one most susceptible to a drop in the value of crude.  NOK, RUB & CAD, whose relation with crude oil can be seen by a high correlation and a high R square (R square is a measure that explains, in percentage, movements in one variable by movements in another), are among the most affected

Click chart to enlarge (15 March-18 May)

As can be seen by eyeballing the above chart in which Brent crude futures is plotted with NOK, CAD & RUB that movement in all the three currencies can be largely explained by an oscillation in prices of Brent crude futures. Also the table at the bottom of the chart shows that CADUSD has the highest correlation of 0.93 with Brent, followed by NOKUSD at 0.87, and RUBUSD being lowest at 0.83 among the three currencies.

Going forward, the price of oil still seems susceptible to an oversupply by OPEC and falling demand in Asia (especially China). In my opinion, new US shale gas supply may also rise if the oil price jumps any higher - US shale gas producer will start thinking about reopening the existing rigs that were closed due to a low oil price. However, a broad sell off seems unlikely and we see a sideways to slightly lower range.

Given our view on oil, we see some weakness for NOK & CAD who have gained strongly since March lows vs. the USD. RUB might be the least affected among the three currencies given our outlook.