Higher oil price

(03.03.2011) Turmoil in Libya pulled the oil price up yesterday. Still, international stock markets rose. The high oil price strengthens the Norwegian krone. EURNOK is currently trading below 7.70, the lowest levels seen since October 2007.

By Camilla Viland, Analyst at DNB Markets

oil rigAn airstrike near Libya's oil infrastructure yesterday raised more fears that the nation's oil sector could become a target in leader Muammar Gaddafi's efforts to hold power. As a result, the oil price rose yesterday and settled at its highest level since August 2008. One barrel of brent oil is currently trading around 116 dollars.

Despite of rising oil prices, the US stock markets rose yesterday. Investors bet the latest sign of economic strength may be able to absorb expected higher energy costs. Yesterday's release of the ADP employment report added to the belief that the economic recovery was improving. According to ADP US private sector employers added 217' jobs in February. Consensus had expected an outcome of 175'. This is yet another sign that the labour market is improving. We will get more information about the state of the US labour market tomorrow, when the important payrolls figures are released.

A new report from Norges Bank's regional network indicates increased activity also in the Norwegian economy. The overall index rose from 1.8 to 1.9 which corresponds with production growth around 4 per cent annualized. Contacts expect growth to be slightly going over the next six month, but are more optimistic than in the previous round. The details display that growth was the highest in the services industry, while other industries showed more moderate growth. Activity in retail sales seem to have abated over the period. This may be due to high electricity prices.

High electricity prices have probably also affected retail sales. In the period from January to February Norwegian retail sales declined by 0.1 per cent. This was weaker than expected. This is the second consecutive month retail sales decline which indicates that demand growth was weaker at the start of the year. There were no major surprises in yesterday's Norwegian key figures. Thus they are not likely to change Norges Banks view on interest rates. We still believe that the next rate hike will take place in June.

The Norwegian krone did not react notably to the Norwegian key figures released yesterday. The strengthening seen yesterday is most likely due to high oil prices. This may be why foreign investors seem to be very interested in the Norwegian krone. Some of the turnover seems to go trough SEKNOK. Investors may now favour the NOK relatively to the SEK due to the high oil price. The high oil price may also be why investors do not sell NOK as they normally do when markets are volatile. Versus the euro the NOK is trading just below 7.70, the strongest levels since October 2007.

No interest rate change is expected at todays ECB meeting. However, as inflation is rising and currently above ECB's target, more and more believe interest rate hikes are nearing. Any possible signals regarding future monetary policy at the following press conference may pose market reactions.