This is what the foreign exchange market says about the petrol price

The oil price rebounded sharply at the beginning of this week when it became clear that the OPEC countries cannot agree on a production limit. However, developments in the foreign exchange market indicate that oil will become cheaper again in the future.

The summer holidays are just around the corner, but for those who leave by car, the trip can turn out a bit more expensive than expected. In the Netherlands, the price of a liter of petrol has risen to a new record this week. The bad news is that it doesn't make much difference if you fill your tank in neighboring countries. Behind the higher petrol price, there is a rising oil price that is being felt everywhere.

A major reason for that price hike is disagreement within OPEC about how to scale back production restrictions. When the global economy ground to a grinding halt in the spring of 2020, the organization agreed to cut production by 10 million barrels per day.

Six times as much as Shell
This production limitation is about 6 times greater than Shell's oil production, which nowadays extracts more natural gas than oil from the ground. The production constraint explains why the oil price has been rising since November last year, while the economic recovery only started after that. Meanwhile, the high oil price even threatens to put a brake on that recovery. A barrel of Brent oil that cost $40 at the end of October is now trading at $78. It is therefore no wonder that the OPEC countries sat down to loosen the reins. The intention was that last Monday the knot about a production increase was cut. But because the United Arab Emirates balked, the talks were unexpectedly called off.

Currency market: oil price will fall
Failure to reach an agreement can mean 2 things. The OPEC countries will stick to the current production agreements or everyone will go their own way and sell as much oil as possible. With a price increase of more than 2%, the oil market initially anticipated the first scenario. But currency markets tell a different story.

Since mid-June, the currencies of oil exporters such as Canada and Russia have fallen 3% against the dollar. The Norwegian krone has even fallen by more than 4%. The price formation on the ICE futures market also indicates that the oil price is going to fall again. There you can order the same barrel of oil that now costs $78 for November for less than $73. And for June next year, that futures price is less than $69.

car holiday
Anyone who travels into Europe by car will, of course, do little with the prospect that the petrol price may be a lot lower in a few months. According to the ANWB, however, the price at the pump is 3 or 4 dimes above the Dutch level in most European countries. The big exception? That's Russia. There you now pay less than €0,60 for a liter of petrol.

But a summer holiday in Russia is of course not a very nice prospect. It is a long drive, the number of corona infections is increasing rapidly and you have to ask yourself whether you want to travel to a country that only assigns the designation 'champagne' to its own sparkling wines and not those of France. Now we just have to learn to live with the pain at the pump.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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