Last week, the WTI benchmark rose $2 to more than US$57 per barrel — its highest level since mid-2015.
While OPEC and other contributing non-OPEC members plan to extend oil production cuts through 2018, last week’s price increase was attributable to a crackdown on corruption in Saudi Arabia, as the king arrested several royal, political and business officials.
“This sparked concern in the market over the stability in one of the world’s top oil-producing countries, and signalled to markets that power in the kingdom was consolidating with those in favour of extending production cuts,” says economist Dina Ignjatovic, in a weekly economics report.
Since the price increase is a result of geopolitics, she says prices are unlikely to gain much more ground.
“Moreover, with prices at current levels, non-OPEC producers — particularly U.S. shale producers — are likely to increase hedging activity, supporting higher production going forward,” she says. “All told, there is more downside risk for oil prices than upside, with prices just over US$50 per barrel likely for the foreseeable future.”
Effect on loonie, bonds
Ignjatovic notes that oil’s price increase hasn’t benefited the loonie, which would typically rise in step with oil prices. Instead, any action for the loonie will be based on monetary policy expectations.
Increased oil prices may be putting pressure on U.S. bond yields, however.
In a weekly economics report, Douglas Porter, chief economist at BMO Capital Markets, notes that the U.S. yield curve steepened slightly last week, perhaps responding to an economy near the end of its cycle and that may see a big dose of (unnecessary) fiscal stimulus if tax reform goes through.
He adds: “Gasoline prices may be down a bit from their post-hurricane highs in September, but they are still up a honking 16% from year-ago levels (23% in Canada).”
While higher oil prices present “growth restraining factors” for the economy, “they nevertheless tend to drive yields higher due to the coinciding inflation lift,” he says.
Prices could see further increases: today, in its latest report, OPEC forecasted increased demand for its oil in 2018, and said the agreed production cuts were reducing excess oil in storage.