Crude bulls, stung by the worst July on record, should expect further pain as slumping commodity currencies cut production costs.
Drillers from Russia to Canada, the world’s second- and fourth-biggest oil producers, sell crude in US dollars while paying most operating costs in local currencies. The Canadian dollar dropped to an 11-year low against its US counterpart this month while the Russian rouble trades near a six-month low.
Global oil supply has proven resilient. A 60 per cent decline in US dollar prices since June 2014 hasn’t curbed US production, which is near the highest level in four decades. Iraq is producing at a record pace and Russian oil output reached a post-Soviet high this year. The world’s oil glut will last through 2016, the International Energy Agency said in an August 12 report.
“The cross-commodity downdraft led by oil, gold and copper has hit producer currencies hard,” Mike Wittner, head of oil-market research at Societe Generale in New York, said by phone. “The weaker their currencies get versus the dollar, the lower their costs. This further weighs on commodity prices and just adds to the negative spiral.”
The Bloomberg Commodity Index of 22 raw materials has fallen 29 per cent since last August, meeting the common definition of a bear market, which is a 20 per cent drop. The loonie, as the Canadian dollar is known, also has taken a hit from declines in iron, aluminium and gold. Russia is the world’s biggest exporter of natural gas and a major producer of gold and coal.
“Divergence in currencies suggests a stronger dollar, weaker commodity currencies and hence lower production costs,” Jeff Currie, New York-based head of commodities research for Goldman Sachs Group, said by phone.
West Texas Intermediate advanced 75 cents to $US42.62 a barrel on the New York Mercantile Exchange on Tuesday, after settling at the lowest since March 2009 on Monday. Brent crude climbed 7 cents to $US48.81 on the London-based ICE Futures Europe exchange.
A one-cent decrease in the Canadian dollar bolsters cash flow for Canadian Natural Resources, the nation’s largest heavy-oil producer, by $C55 million to $C60 million, chief financial officer Corey Bieber said August 6 on an earnings call.
Per-barrel production costs for Canadian oil producers have fallen about 20 per cent from a year ago, helped by the exchange rate, and some of the savings will last, said Kyle Preston, an analyst at National Bank Financial in Calgary.
“It’s setting the industry to be a lot leaner going into a potential recovery,” Preston said. Canadian crude production is poised to rise 4 per cent this year, according to the Canadian Association of Petroleum Producers.
OAO Rosneft, the world’s largest traded oil producer, increased drilling by 27 per cent in the first seven months of the year, the company said August 13. The nation’s exports remain just as profitable as they were a year ago when the oil price was about $US100, according to Citigroup.
A US rate gain, possible as early as September, would bolster the dollar and reduce the appeal of commodities priced in the American currency as a store of value. Futures show a 48 per cent chance the Fed will raise borrowing costs at its next meeting on September 16-17.
“When the Fed raises rates, it’s inevitable that the dollar will rise and oil will fall,” Michael Corcelli, chief investment officer of hedge fund Alexander Alternative Capital in Miami, said by phone. “It’s not only the dollar that’s weighing oil, it’s also excess supply.”