High oil price leaves currency world cold

The rise in the price of oil completely surpasses the Russian ruble. This has everything to do with fears of an invasion of Ukraine and the prospect of a series of rate hikes in the United States.

The sharp rise in the price of natural gas was in the spotlight last autumn. Between early March and mid-December, the price on the spot market increased more than tenfold. Besides a considerably higher energy bill in 2022, this price movement also caused several energy companies to go under. Since the start of the new year, however, the rise in the oil price has taken the leading role in the energy world. The price of a barrel of Brent oil traded above $88 on Wednesday. That same barrel cost about $55 at the beginning of last year. And at the height of the coronavirus panic in March 2020, it was just over $20.

Striking price movement
A strong price movement in the oil price often affects the currency world. That is no different this time, but the effect is very different than you might think. As the largest oil exporter in the world, Saudi Arabia has pegged the value of the riyal to that of the dollar, so this currency is not a firecracker. With exports of approximately 4,5 million barrels per day, Russia ranks second in the export ranking. Despite the significantly higher oil price, the value of a ruble has fallen to less than 13 cents. At the end of October, the coin was still worth more than 14 dollar cents. The price decline is a result of both a prominent cause and an important consequence of the oil rally.

Question of supply and demand
The shortage in the oil market is the sum of all kinds of factors. For example, the demand is somewhat higher than expected. That's because more and more countries, such as Great Britain, are choosing to ditch lockdown measures. On the supply side, there have been production problems recently in Libya, Ecuador, Nigeria and Malaysia, among others. Concerns over the oil supply in 2022 were fueled this week by a drone strike by Houthi rebels on an oil facility in Abu Dhabi. But the main reason for geopolitical turmoil is, of course, the threat of a Russian invasion of Ukraine. Time is running out for Russia to flex its military muscles.

A big mud puddle
When the spring weather sets in, the countryside of Ukraine will turn into a large mud pool in which Russian tanks and troops can get quite stuck. If President Vladimir Putin chooses to invade his neighbor in the short term, Western countries will undoubtedly impose very strict sanctions. That puts pressure on the ruble. The current weakness of the Russian currency is also the strength of the dollar. The US currency has the wind at its back from the prospect of a series of interest rate hikes in 2022. With this the Federal Reserve wants to contain inflation, which is rising due to rising energy prices. The ruble will not really benefit from a higher oil price until US interest rate hikes are over and fears of an invasion of Ukraine have subsided. 

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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