Black crack is going higher and higher, with crude oil prices currently trading close to $100/barrel. This partly explains why the Loonie has managed to hold on to its gains, despite risk aversion haunting markets.
Remember that oil is Canada’s biggest export. This is why the Loonie shares a positive correlation with the commodity. After all, it only makes sense that people would need Loonies to buy Canada’s oil.
1. Tropical Storm Isaac threatens the Gulf of Mexico
Basic Economics tells us that if supply goes lower while demand rises or stays constant, the price of a commodity goes higher. Based on this economic theory, we may just see oil prices continue to trickle higher as Tropical Strom Isaac heads towards the Gulf of Mexico, which produces 23% of total crude oil in the U.S.
It has already been estimated that 78% of the Gulf’s daily production has already been shut in. Yikes!
2. Tensions in Iran and Syria could limit oil supply
Ongoing conflicts in oil-rich countries in the Middle East, namely Syria and Iran, have provided support for oil prices over the last few months. With the tensions in Syria expected to spread to its neighboring countries in the Persian Gulf, such as Saudi Arabia and Qatar, oil supply could take another huge blow later on.
It doesn’t help that the EU halted its oil imports from Syria back when the war started in March. Similarly, Iran was also placed under oil imports sanctions by the EU, U.S., and several Western nations due to their disputed nuclear program. Because of these embargoes, oil production in both Syria and Iran has been at a standstill, placing additional downward pressure on oil supply.
3. Expectations of further stimulus from the Fed
Last but certainly not least, talks of another round of quantitative easing from the Federal Reserve are pushing commodity prices higher lately. Recall that the downbeat FOMC July meeting minutes brought QE3 speculations back to the surface, prompting traders to price in their expectations of further stimulus down the line.
Bear in mind that, if the Fed prints more money to stimulate the U.S. economy, the value of the U.S. dollar could drop. As a result, commodities which are usually treated as hedges to inflation would rise in value.
Of course this isn’t exactly good news for U.S. consumers who are already frowning about rising gas prices, which are nearing $4 per gallon again. If Bernanke confirms the possibility of QE3 during his Jackson Hole speech this week, commodities could shoot up again and crude oil might even break above the $100/barrel barrier.