Saudi Arabia, the top exporter among oil producers grouped under the Organization of Petroleum Exporting Countries (OPEC), and Russia announced on May 15 that they favored extending production cuts for an additional nine months into 2018, rallying oil prices. The celebrations, however, might be short-lived. As we have pointed out on several occasions, fracking technology has made the United States a major swing producer in energy markets, diminishing the influence of Saudi Arabia and other OPEC members. OPEC members will meet on May 25 in Vienna to decide on renewing production cuts. From just the end of October 2016, U.S. producers have added nearly 900,000 barrels per day (bpd) to their production, largely offsetting OPEC’s current production cuts. The rise in U.S. production has contributed to an extraordinarily flat futures curve for West Texas Intermediate crude oil, hugging $50 per barrel far into the landscape (Figure 1). And, the ability of U.S. producers to offset changes in production from OPEC countries may be contributing to a decline in both realized and implied volatility in crude oil (Figure 2). View our video on this topic here.
For most of the past six years, the Canadian dollar (CAD) closely tracked movements in West Texas Intermediate (WTI) crude oil. But from mid-2016, CAD began diverging, underperforming WTI significantly (Figure 1). And the parting of ways was not the result of a generally stronger U.S. dollar (USD). The Russian ruble, which also correlates highly with oil prices, has outperformed WTI over the same period (Figure 2). Both Canada and Russia are major producers of crude oil. CAD’s divergence from oil may have to do with deeper economic problems: the country’s extremely high levels of debt and overvalued real estate prices.
As OPEC members meet in Vienna on May 25 to discuss extending their production cuts for another six months, U.S. shale producers have been ramping up supplies.
Unlike the first round of the French presidential elections on April 23, which saw an exciting four-horse race, the upcoming parliamentary elections in the United Kingdom appear to be a one-sided affair.
Off The Charts! examines the pertinent economic issues of the day, providing a deeper dive into complex topics and framing the issues in a way that can lead to a better understanding of the financial and commodities markets.