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Crude Oil Volatility Drives International Currency Markets

Crude Oil Volatility Drives International Currency Markets

Global supply and demand is the ongoing energy challenge. It changes over time with very little fanfare. The industry is often attacked in intellectual settings as a greed driven business run by bright leaders with few scruples. This is partially true, but the business is fraught with international wars, politics, genocide, famine, currency collapses, and medical disasters which decrease energy demand. Falling prices deter oil and gas companies from drilling for new oil fields. Each country’s internal energy demand and imports impact GDP and world politics.

Managing energy requirements in a world of competing companies is difficult. Wars interrupt oil and natural gas supply and international shipping is not easy. Independent energy sourcing is key. This may be augmented by renewable energy, but many countries fail in this expensive area. Long term planning is a luxury in third world countries.

Oil prices fell about 75% from its $107/Bbl high in June 2014 to the current trading range of $30 to $35 per barrel. The large volatility of this commodity arena allows international politics to destroy margins around the globe with many consequences. Currency impacts how much energy people can afford to purchase.

Important factors influencing the oil equation include:

Energy independence in country significantly changes with new supply basins coming online.

Manufacturing moving into third world countries lowers domestic energy requirements

Presidents or Prime Ministers die and new leadership lacks the power or force to push the former business platform ahead. Examples of this include Cuba and Venezuela.

Currency collapses impact the real underlying costs of commodities and products.

Changes drive traders into markets where basis differentials expand or shrink such as Canada, Venezuela, Mexico, and Russia. Currency strength increases for most energy exporting countries as oil prices strengthen. Expect currency strength in Canada to exceed that of Mexico and Russia until oil prices exceed $55 per barrel, excluding other factors like war in the Middle East.

Mexico’s crude oil basis differential will increase in volatility due to deregulation, new pipeline hubs, and new load growth in its growing economy. Use of solar in Mexico could slow this impact. Renewable energy swing supply is not a near term issue. Canadian crude oil basis differentials are negatively impacted as the oil prices fell to $30. This is below their lifting cost. The east versus west crude oil prices seem larger when commodity prices fall due to high fixed transportation costs.