Pain at the pump, party on the foreign exchange market

The price of 1 liter of petrol could easily creep towards €2 in the coming period. That's bad news for car owners, but it sounds like music to traders in Russian rubles and Norwegian kroner.

As of week 39, the OPEC oil cartel is the most recent addition to the long list of people and organizations with whom US President Donald Trump is at odds. According to Trump, OPEC should extract more oil from the ground, in order to push the oil price down.

Since mid-August, the price of 1 barrel of Brent oil has risen from $71 to almost $82. That is the highest level since the autumn of 2015. That significant increase is thanks to Trump himself. The sanctions he imposes on Iran will ensure that 2 million barrels of oil per day less will flow into the world market in November.

Another factor threatening the oil supply is the economic chaos in Venezuela. Oil production in that country has halved in recent years.

Euro95 to new record?
Several commodities traders predict that the price of Brent will then jump to $100. Such a price increase is going to hurt the pump. The suggested retail price for 1 liter of Euro95 is already €1,784. At this rate, it's only a matter of time before the 1,895 record $2012 is smashed.

In the foreign exchange market, the rising energy price is causing oil currencies to rise. The ruble has risen by more than 2% against the euro in the past 5 weeks. The advance is a lot stronger than that of, for example, the Norwegian krone, which gained more than 2% in value.

Dollar rises
The advance of the ruble has accelerated, partly due to the fact that traders have to hedge their positions. In doing so, they were anticipating a further decline in the Russian currency. It was (like the currencies of other emerging markets) under pressure from rising US interest rates.

That higher interest rate also contributes to higher prices at the pump. Over the past six months, the dollar has appreciated about 5% against the euro. Since oil is billed in dollars, that upswing also contributes to the rising gasoline price.

fuel inflation
If the petrol price actually rises, this will also have consequences for the euro. Higher energy prices are driving inflation, which may tempt the ECB to the interest to increase earlier. The euro will then be given a boost, while it will finally pay off again to put money in a savings account; provided that not everything goes for higher petrol costs.

However, it is a bit premature to choose a position for this scenario; After a few tweets from Trump, things could be completely different after all.

Lawrence Martins

Laurens Maartens is a currency expert at the Dutch Payment and Exchange Company (NBWM). Maartens analyzes current currency developments and also provides lectures and training in the field of currency management.

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