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U.S. Crude Rises Above $60 per Barrel

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The surge in crude prices began in early November when U.S. inventories were replenished and news about a coronavirus vaccine surfaced.

U.S. crude oil broke the symbolic $60 per barrel threshold on Friday continuing the post-pandemic recovery of the world's most important commodity.

U.S. crude prices surged to $61.50 per barrel on Friday, the highest level since before the pandemic, as a combination of cold weather and expectations for a strong economic recovery have investors bidding up the price of oil.  It was the highest price for West Texas Intermediate (WTI), the U.S. benchmark, since January 3, 2020 some three months before the coronavirus pandemic.

Brent crude, the global benchmark, reached a price of $66.13 at the close of business Friday having pierced the $60 level back on February 8th.  The Brent benchmark typically runs two to three dollars more than WTI.  For the year, U.S. crude is up 27% while Brent is up 28%.  The rise in the price of crude is a dramatic turnaround from the 20.5% pandemic-driven decline in U.S. crude in 2020. 

The rise in price is significant for both the supply and demand side of the market.  Oil companies need a robust market price typically in the $60 to $70 range in order to maintain drilling operations at a profitable level.  But, the rise in crude raises the price of gasoline for consumers at the pump.  Gas prices in many places across the United States are now above $2.50 per gallon, the highest level in more than a year.  

Although cold weather is a clear catalyst of crude prices, some analysts think investors have pushed oil prices above levels justified by supply and demand, according to an article on the oil price rally in the Wall Street Journal in February.  Still, the cold weather has increased the demand for fossil-fuels from utilities. 

The steady rise in crude oil prices this year is potentially a positive sign for the global economy as the price of the world's most important commodity is typically an indicator of economic activity as long as supply remains uninterrupted.  Most economic forecasts have called for the U.S. economy to grow around 4% in 2021. 

Like oil, other commodities are recovering from last year as the global commodities market is up 11.43% this year through February 26th, according to the Dow Jones Commodity Index, continuing the impressive rise of 19.6% in the fourth quarter of last year.  Commodities finished up 13.9% for the year in 2020.

Crude oil has been one of the most volatile commodities in the past few years with an average annual volatility rate of 13.5% since 2016.  Oil was one of the biggest hot spots among global commodities last year with a volatility rate of 26.8%. To put it in perspective, if oil had been a currency, it would have been the second hottest currency in the world behind only Venezuela. 

The volatility of crude has created a ripple effect for the currencies of major oil producing countries such as Norway and Russia, two countries that were among the 15 hot spots in global currencies last year. 

The Norwegian krone had a volatility rate of 7.36% in 2020 as it reached an all-time low against the dollar of 11.786 only to recover at the end of the year as oil prices recovered.  By December, the krone was at a strong 8.578 per dollar, higher than it started the year. 

The year 2020 marked the second time since 2012 that Norway was a hot spot for currency volatility, a rare occurrence among developed economies, having previously reaached the level in 2014.  Equinor ASA based in Stavenger, Norway is one of the largest crude oil producers in the world with annual revenue of over $80 billion. 

Russia's ruble was the fifteenth most volatile currency in the world last year, but didn't reach it's all time low against the dollar until October 30th when it reached 79.4 rubles to the dollar only to rebound slighlty to 74.02 by the end of the year.  Russia is a major exporter of crude and natural gas with three of the world's largest oil and gas companies.  Rosneft PJSC, Gazprom PJSC and Lukoil PJSC all have annual revenues of around $130 billion.

Written by John Bassford, senior credit analyst.