Why Oil Price Is Falling And How It Affects The Currency Markets

Hello Traders,

I’m not a forex fundamental freak but once in a while,  I come across things that do arouse my curiosity. And this topic is one that got my curiosity lately because, I’ve seen a handful of news about Oil Price falling too low and then there’s talks about risk of Russia defaulting.

So I did a little bit of research:

The short version of the story goes like this: For much of the past decade, oil prices were high — bouncing around $100 per barrel since 2010 — because of soaring oil consumption in countries like China and conflicts in key oil nations like Libya. Oil production couldn’t keep up with demand, so prices spiked.

• In June 2014, oil price was more than $115 per barrel, in mid Dec its around $$59 per barrel. Why?
• OPEC Meeting in Nov 27th 2014 failed to come to an agreement to curb (reduce/slash/cut) production. This sent price tumbling down as seen on the chart below.  Note. OPEC countries control 40% of world’s oil supply.

HERE ARE  THE 4 REASONS WHY THE OIL PRICE IS SO LOW

1. Low demand-due to weak economic activity, increased efficiency and a growing switch away from using oil to other fuels
2. Turmoil in Lybia & Iraq-two big oil producers with nearly 4m barrels a day combined—has not affected their output. The market is more sanguine about geopolitical risk
3. America has become the world’s largest oil producer. Though it does not export crude oil, it now imports much less, creating a lot of spare supply
4. The Saudis and their Gulf allies have decided not to sacrifice their own market share to restore the price. If they did reduce production sharply, the main benefits would go to countries they detest such as Iran and Russia. Saudi Arabia can tolerate lower oil prices quite easily. It has $900 billion in reserves. Its own oil costs very little (around $5-6 per barrel) to get out of the ground

HERE ARE  THE REASONS WHY THE OIL PRICE FALLING AFFECT CURRENCIES

The price of oil has been a leading indicator of the world economy for decades, and experts predict that that won’t be changing any time soon. The connection between the price of oil and the economy of many countries is based on a couple of simple facts:

1. Countries with healthy supplies of crude oil benefit economy-wise from higher oil prices.
2. Countries who depend on imports for their energy needs benefit from lower oil prices and lose when oil prices rise.
3. When the economy of a country is strong, its currency is also strong in the forex market.
4. When the economy in a country takes a downturn, its currency loses value in the currency exchange rate.

In the currency market, exchange rates are often predicated on the health of a country’s economy.

If the economy is robust and growing, the exchange rates for their currency reflect that in higher value.

If the economy is faltering, the exchange rate for their currency against most other currencies also stumbles. Knowing that, the following makes sense:

1. The currency of countries that produce and export oil will rise in value.
2. The currency of countries that import most of their oil and depend on it for their exports will drop in relative value.
3. The most profitable trades will involve a country that exports oil vs. a country that depends on oil.

SUMMARY

1. Russia’s situation is getting the most attention these days. The country’s is hugely dependent on oil and gas production — with oil revenues making up 45 percent of the government budget — and the sharp fall on prices has been ruinous.
2. But its not all good news in US for Many oil fracking and drilling extraction companies drilling to extract oil from shale formations  as they are are finding/or going to find themselves  losing money and not economical to run those operations because of the lower oil price.
3. Lower oil price means that those manufacturing heavy countries dependent on oil imports will manufacture cheaply…but whether the world is ready to buy is another question with the current state of economy of the world.
4. Well, the last bit is the fact that I have seen fuel prices start to drop at the pump which is a good thing.

Will the oil price head back up again? Its hard to tell at this stage.

• if a war breaks out in middle east (AGAIN!!!  Do these guys ever stop fighting…goodness!!!) Yes…price will rise up.
• China’s economy can come back up.
• Europe may rebound from its economic lapse…
• The Saudi’s and OPEC could decide to cut down on  production.

All these things above could make oil price increase.

Please like, share, by clicking those buttons below.

Source Of Info:

http://www.vox.com/2014/12/16/7401705/oil-prices-falling

http://www.economist.com/blogs/economist-explains/2014/12/economist-explains-4

http://ourfiniteworld.com/2014/12/07/ten-reasons-why-a-severe-drop-in-oil-prices-is-a-problem/