Story behind spiking oil prices, greenback appreciation: report

Oil prices are surprising to the upside lately, hitting their highest levels since 2014, say Desjardins economists in a Thursday report.

West Texas Intermediate (WTI) closed at US$68.01 on Wednesday while Brent Crude closed even higher at US$74.06.

“One might wonder what is behind this increase when the dramatic surge in U.S. crude production signalled just recently a balanced global oil market and the price of WTI staying at around US$60 a barrel,” says the report.

Read: What investors should know about oil and geopolitical risk

The answer, the economists explain, is “worries have surfaced about the Organization of the Petroleum Exporting Countries (OPEC) oil supply, which explains the recent rise in oil prices.” While “most analysts” had called for OPEC production to remain steady, a “sharp drop” in Venezuela’s production has affected activity.

The extra hurdle is other OPEC members may not be willing to pick up the slack, “particularly Saudi Arabia,” the report says, adding that markets are now worried about the after-effects of “another supply shock” that could further derail oil market stability.

The economists say they’re “now banking on the WTI price to remain close to US$65 a barrel in the coming quarters. In addition, the risk to this scenario is on the upside for the short term if new sanctions are imposed on Iran,” leading up to the May 12 OPEC meeting.

Read: Why oil’s pain could be renewables’ gain

U.S. dollar news

In a separate Thursday report, Desjardins experts highlight the recent appreciation of the greenback.

“Greenback appreciation is widespread across all major currencies and is consistent with the surge in bond yields observed since about mid-April,” that report says. “This surge was stronger in the United States, benefiting the currency.”

The major driver of this development is renewed confidence in the U.S. Federal Reserve, the report adds. “Not so long ago, many doubted that the Federal Reserve would announce three increases of 25 basis points in its key rates during the year. Now, analysts are increasingly starting to consider a scenario with four hikes.”

Read: How to rise above rising rates

The loonie isn’t on the same path, given “Continued monetary tightening remains uncertain in Canada.” While rising oil prices are providing a boost, the report says, economic and global trade risks are weighing on the currency.

The Desjardins economists expect the U.S. dollar to lose momentum as “monetary tightening is set to become widespread,” while the loonie “is expected to hold its own in the short term, provided that the risks hovering over the Canadian economy fade and the BoC continues its monetary tightening.”

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