The Relationship Between Oil and Currency
- 08 Mar 2021
Oil forms the largest traded natural commodity globally. About 4.5 billion metric tonnes are produced annually. It is also the backbone of many economies, especially in the Middle East, which produces almost 50% of all crude oil. The oil trade is estimated to hold 3.8% of the world’s GDP.
It then comes as no surprise that anything that affects crude oil’s price movement directly impacts the money market. Most currencies suffer fluctuations from time to time, depending on the daily changes in the oil markets. The article explains why that happens.
The Use of USD as the Contract Price Quote
The United States the largest oil producer and exporter. It produces 17% of the total crude oil in the market, according to 2019 statistics. The US is, however, not very dependent on oil export to power its economy. The most significant aspect here is the fact that oil price quotes are in US dollars. This is where the relationship between currency and oil begins.
Any fluctuation in the value of the US dollar to the higher side in relation to other currencies means that you will require fewer dollars per barrel of crude oil. When the price fluctuates downwards, you use more dollars to buy the same barrel. The oil dollar price quote is not confined to oil producers but all countries globally.
While the United States gets to enjoy the benefits of being the quote currency, countries that rely on oil importation can find the fluctuations hard. When the dollar fluctuates downwards, they end up paying a lot more for oil.
Economic Dependence on Oil
The major oil producers and exporters are too dependent on oil for their economic survival. They will thrive on high oil prices, but a collapse will devalue their national currencies. This is where the money market volatility lies. Currencies are affected by significant political and world news, among other issues.
Economies heavily depending on oil experience fluctuation in their currencies depending on the USD price of oil per barrel.
If you want to trade forex, you need the best trading account to avoid losing investment in such instances. A good forex broker or trader will keep up to date with the happenings worldwide that can affect oil prices. They should be quick to analyze and make a trade decision.
As the points above show, there remains a huge relationship between the oil industry and world currencies. The main reason is the fact that the price quote is USD. In the forex market, the USD is the most easily traded currency in the world. You can be pair it with every other currency because it unofficially acts as the global reserve currency. There are countries where the dollar is accepted as a legal tender in transactions together with a local currency.
The other reason is major exporters’ dependence on oil. Their currencies are dependent on the price of oil to the dollar, making their national currency volatile. The USD remains a vital aspect of the forex trade that some countries use to stabilize their exchange rates.