Oil prices have been surging and could rise to $US100 a barrel, NAB says.

That’s good news for investors in ASX oil explorers, especially as activity in the sector hots up in the wake of the Carnarvon discovery off WA.

But higher oil prices could also provide support for the Aussie dollar, say NAB currency strategists Ray Attrill and Rodrigo Catril.

The pair noted that historically, when oil prices rise the US dollar usually falls. But interestingly, that correlation has recently turned positive (see graph below).

They attributed the shift to the rapid growth of the US shale oil industry, which has made the US a net oil producer so the economy benefits from higher prices.

However, “unlike other commodities, oil is a unique beast with a more direct negative link to US consumers”, they said.

So although higher oil prices help the US oil industry, they are “bad news for the US consumer and the US economy in aggregate”.

At current prices, oil would have to rise by another 27 per cent to reach $US100 a barrel. And similar rises in the past have led to falls in the USD, except on occasions when US bond yields were also rising sharply.

But the analysts said that if oil rises back to $US100 a barrel, the US dollar could fall by more than 5 per cent.

Source: NAB

“This in turn suggests the AUD/USD would rise, consistent with our AUD fair value model which incorporates brent crude,” they said.

In isolation — ignoring any spillover effects to other commodities — they said $US100 oil should give rise to a 2-3% increase in the AUD.

However, that will only occur if the rise in oil continues a steady upward trend. If it climbs too fast, the move is “likely to be accompanied by a sharp deterioration in risk sentiment”, which “would be a significant opposing force” on AUD strength.

Brent crude is currently at a four-year high above above $US80 a barrel — a gain of around 14% from mid-August.

NAB highlighted three main reasons for the shift: the pending US sanctions against Iran in November, ongoing production declines in Venezeula, and bottlenecks in US shale oil production due to a lack of infrastructure.

And over the weekend, major OPEC producers said they wouldn’t be responding to the current supply outlook with an immediate lift in production.

In addition, industry analysts have highlighted the risk that Iran could respond to sanctions by fostering political unrest in Iraq which could affect exports through Basra — the port from which 75% of all Iraqi oil is shipped.

All those factors “are leading to suggestions from a multitude of sources that Brent crude oil could head back to $US100 in the coming months”, NAB said.


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