Afternoon analysis 26.07.2016

Increasingly lower quotations of oil are beginning to impact exchange rates of currencies of raw material countries. The Nigerian naira is yet again increasing its overvalue, despite the recent devaluation. The zloty remains stable against the main currencies.

Decrease in oil prices

We have been observing a slow, yet systematic decrease in oil prices for a few weeks. Today, the WTI was below the limit of 42.5 USD per barrel. This is clearly less than at the beginning of June, when the rate was above 51 dollars. The main reason for a decrease in oil prices, is a significant supply of oil products, especially fuel.

The demand for fuel was expected to grow quickly during the holiday season. However, this scenario is not happening. Moreover, refineries have prepared themselves for an increased demand for fuel. This causes an oversupply of this product. According to the EIA, fuel supply in the USA is more than 10% higher in comparison with the same period of 2015.

This is seen even better after looking at the stock market prices of oil and fuel from the past holidays. Last year, the WTI value was approximately 10% higher than it is now. Moreover, prices of fuel at Chicago Mercantile Exchange were approximately 40% higher in July 2015. As a result, refineries may begin to limit the production of fuel. This may cause the return of anxieties over a slower than expected decrease in oil supplies.

Additionally, the oil companies that were previously counting for the prices of oil to remain at the level of 50 US per barrel, are clearly increasing the amount of their drill shafts. This may extend the period of balance between supply and demand. Especially taking into consideration that the production from Canada returned to its levels from before the wildfires.

The area of 43 USD per barrel is beginning to impact evaluation of currencies of countries that are dependent on the energetic resources export as well. For the past two weeks, the dollar strengthened against the rouble, the Mexican peso and the Norwegian krone more than 4%, 2.5% and more than 1%, respectively. These are not large values. However, if the trend on raw materials does not change, we may be dealing with a stronger capital flow from the raw material currencies to the USD. This phenomena was observed during the past winter, for example. At a certain moment, this element supported the buck worldwide.

Naira under pressure and steady zloty

Recently, we have been mentioning the Nigerian currency quite frequently. This was mostly a result of its significant devaluation in the second half of June. The USD/NGN increased from 200 to 280. Later, its quotations were perfectly stable. This began to cause suspicions that we are dealing with yet another intervention of the central bank, despite that the exchange rate was to be shaped by the market.

This stabilization ended a few days ago. Currently, the USD/NGN is at the level of 315. However, it is likely that the niara will continue to depreciate. This may be caused by high inflation, insufficiently restrictive monetary policy and lost incomes from the oil export, caused by the attacks in the Niger River delta. Moreover, even if mining returns to its previous levels, we are still dealing with a clear decrease in prices. This is also negative for the NGN and even to a definitely larger degree than for the currencies mentioned in the above paragraphs. This is because according OPEC, oil is 90% of the Nigerian export.

Getting back to the Polish market, the zloty remains steady. Moreover, a relatively positive opening of the American market is causing a minor appreciation of the Polish currency. Situation of the zloty should not change extremely during the forthcoming hours. Very limited moves remain the base case scenario.