Higher Oil Prices May Not Necessarily Sustain Krone Increase

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Includes: NOKS
by: Discount Fountain

Summary

While brent crude oil has risen to the $65 level, an appreciation of the Norwegian Krone may simply be temporary.

Other industries across Norway have been struggling to contribute to economic growth.

With the prospect of a further rate cut in June, the rise in the Norwegian Krone may simply be temporary.

In a previous article on March 26, I argued that even in the face of rising oil prices, the Norwegian Krone would have limited upside. With Brent crude oil rising to the $65 level, the krone has risen to a greater extent than I anticipated. For instance, I had forecasted that crude oil prices of $75 would be necessary to justify a rate of 0.11769. However, the krone has appreciated from a level of 0.116 to 0.118 - with oil prices being $10 lower than in the scenario I had outlined. However, is an increase in oil prices enough to sustain the krone?

Firstly, while oil prices are rising, this does not necessarily mean that oil exports will also rise by the same order of magnitude. For instance, a previous drop in oil prices has meant a drop of 20 percent in spending on exploration and production. Additionally, various industries in Norway have struggled to contribute real growth - with wood production going lower as global paper demand dries up. Moreover, while Norway has seen some growth in areas such as aquaculture, the relatively small sizes of such industries have not served as a source of real growth. I mention these industries for the purpose of illustrating that even in spite of oil price increases, other industries are concurrently on the decline and a drop in oil production will not be enough to bolster exports near-term.

Moreover, in spite of an appreciating krone, a rate cut has not been ruled out, with analysts forecasting that the central bank will proceed to cut rates this June from the current policy rate of 1.25%. While the krone is strengthening currently, the currency had depreciated to a greater extent than the euro in March, making it the second worst performing currency globally over a five-day period. Additionally, should oil prices rise in the near term - there is a supply issue since production may not increase fast enough, or indeed demand will not rise quickly enough as prices rise.

In conclusion, the Norwegian Krone could drop further against the Euro given anticipations of a further rate cut. While oil prices are rising, the effects of the same on real economic growth will not materialize for quite some time. In this context, the rise in the krone may simply be temporary.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.