The Canadian Dollar's Hook-up with Oil Pays

© Viv Idrange, Adobe Stock

Oil prices and the Canadian Dollar both rose following the release of data showing lower US stockpiles mid-week.

Crude oil prices and the Canadian Dollar have both risen following the release of US oil inventory data for the week ending February 9, released by the Energy Information Administration (EIA), which showed US oil stocks failing to rise to the forecasted 2.8 million barrel mark, but rather coming out at 1.85m, at about the same level as it was in the previous week (1.9m).

Other data in the report showed inventories at the Cushing oil depo in Oklahoma declining -3.6m during the past week, a massive jump from the -0.7m of the previous week.

This suggests strong demand for oil which in turn bids the price higher; and higher oil prices matter for the Canadian Dollar as the correlation between the two is growing in prominence once more according to a number of analysts.

"The usually strong correlation between crude oil and the loonie has come back, after taking a break following the BoC’s hawkish shift," says Dennis Tan, an analyst with Barclays. Oil is Canada's largest export so changes to its price affect raw demand for the Canadian Dollar and therefore its exchange rate, especially with the US which is a major importer of Canadian oil.

Storage levels at Cushing are important because it serves as the delivery point for the U.S. crude oil benchmark, West Texas Intermediate.

The constricted supply picture painted by the data contrasted with the general tenor of expectations which have emphasised the strong productive capacity of the US, especially now with more shale oil producers coming on line due to rising global prices.

"Too long has the market ignored the rising US production levels, as market-watchers," says Overseas Chinese Banking Corporation economist, Barnabas Gan.

WTI Crude Oil traded higher at 59.41 from a pre-release 58.30.

After the data CAD/USD was trading higher at 0.7970 from 0.7910, USD/CAD was down at 1.2548 from a pre-release 1.2650.

But, the Pound-to-Canadian Dollar was actually higher after the data as the Pound rose on its own drivers; nevertheless dynamics in the oil price market might be something to watch for GBP/CAD over coming days and weeks.

The recent strong rally in oil prices has largely been driven by self-enforced supply cuts by members of the Organisation of Petroleum Exporting Countries (OPEC) in order to manipulate prices higher, and fight erosion from rising US production.

However, prices have since come under pressure as it appears supply is growing. "Recent data showed US crude oil production crossing its 10 million barrels per day (bpd) mark, while rig counts gained into February," says Gan. "Although we remain positive on crude oil prices until year-end, an interim correction into 1Q18 cannot be ruled out."

This could yet weigh on the Canadian Dollar if the CAD-oil price linkage remains intact.

"From a technical view, crude oil’s rally has gone for far too long and far too strong in January, and with the blood-letting seen in equities and risk appetite, crude oil appears primed to see more downside into 1Q18," adds Gan.

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