The Impact of the Oil Supply on the Forex Market
The modern economy is powered by oil and most economies are heavily reliant upon a regular supply of oil. Economies that need to import their supplies of oil can be adversely affected by a slowing in the oil supply and the resultant rise in price, conversely, countries that are in a position to export the product will appreciate the resultant rise in prices.
With this strong reliance on oil, a country’s currency can rise and fall with any change (or whisper of change) in the supply or price of oil. Upheaval in the middle east in particular, can have a serious impact on oil and currency prices.
The situation becomes a little more complex because for at least the past forty years, the price of oil has been set by either OPEC, the Saudis or the new rising power the North American shale oil producers.
OPEC and the Saudis have essentially been able to dictate the price of oil, which has been pegged to the US dollar since the early seventies. The rise of the US shale oil producers has been a disruptive influence on this price setting (some would call it price fixing) arrangement.
Over the past couple of years, there has been a near oversupply of oil which has caused oil prices to fall from highs exceeding $116 US to as low as $32.78 in 2016. The price recovered somewhat before falling to $44.61 in late 2018. As at October 16 the price is $53.36 a barrel. In the corresponding period, the US. Has almost doubled oil production.
This new influence from the North Americans has seen some more realistic oil pricing based upon the traditional economic laws of supply and demand. The resultant lower prices have seen currencies that are regarded as petrol currencies come under some pressure.
Some of the currencies most exposed to falling prices created by greater supply include:
● The Canadian dollar. Canada is the fifth largest producer of oil in the world and around 14% of its total exports is oil. This makes the economy heavily reliant on oil production and its currency value has become closely linked to the price of oil. ● The Russian Ruble. Russia’ economy is heavily dependent on energy production which makes up close to 70% of its export income. This heavy reliance makes the Ruble very exposed to rising oil supply and the subsequent falls in price. ● The Norwegian Krone. Again, the Norwegian economy is heavily reliant upon the export of crude oil, which accounts for over 20% of its export earnings.
Other currencies at risk include the Brazilian Real and the Colombian Peso. Interestingly, although the US is a major producer and exporter of crude oil, its economy is sufficiently diverse to be able to absorb most oil price fluctuations. It is important to understand that as the price of oil is set in US dollars, that theoretically at least, the dollar’s value should move in the opposite direction to the price of oil to reflect the true value of oil in the marketplace.
While the supply and price of oil can be an important fundamental in determining the future direction of a particular currency, it is only one of many competing factors.
Before jumping into trading on the global market, it is important that you have a thorough understanding of the fundamentals that affect currency prices.
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