Oil Up but Loonie Not Following

Crude oil prices have spiked to the highest nearly 14 years, although the Canadian dollar is not going along for the ride.

As can be seen on the April futures chart below, prices rallied as high as US$130/barrel, closing in on the all-time high of around $147 notched in the summer of 2008. Much of the gains today were linked to the formal announcement of an American import ban on Russian oil and other energy products. The ban comes in response to Russia’s invasion of Ukraine.

Oil has moved sharply higher ever since the invasion began on Feb. 24. Russia is one of the world’s biggest oil producers, response for an estimated 10% of the global supply. However, the Canadian dollar has not tracked oil higher, with the loonie today falling to its lowest since December (see spot Canadian dollar chart below).

In a website post last week, Farm Credit Canada Principal Economist Sébastien Pouliot acknowledged that strength in the oil market should be pushing the Canadian dollar higher. However, he said the uncertainty regarding the conflict in Ukraine is instead supporting the US greenback.

If the loonie stays weak, it will boost Canadian exports, help growth but also make imports pricier and cause additional inflationary pressures at a time when inflation is hitting levels not seen in a generation, Pouliot said. This might force the Bank of Canada to take a more aggressive approach to curb inflation by raising interest more rapidly than it otherwise might, he added.

Another possible outcome is that the war and economic sanctions on Russia will cause global economic growth to slow, weaken inflationary pressures and delay expected interest rate hikes from western central banks, Pouliot said.

During the early stages of the pandemic in the spring of 2020, crude oil actually went negative amid various international government stay-at-home orders. Prices steadily recovered but as recently as January were still under $80.