How the Future of the Oil Marketplace Can Affect Forex Trading

Why should you worry about the price of oil if you’re not buying and selling oil?

If you’re trading currencies, there’s one very good reason. Many of the most important currency trading pairs rise and fall on the price of a barrel of oil. The price of oil has been a leading indicator of the world economy for decades, and experts predict that that won’t be changing any time soon. The connection between the price of oil and the economy of many countries is based on a couple of simple facts:

1. Countries with healthy supplies of crude oil benefit economy-wise from higher oil prices.

2. Countries who depend on imports for their energy needs benefit from lower oil prices and lose when oil prices rise.

3. When the economy of a country is strong, its currency is also strong in the forex market.

4. When the economy in a country takes a downturn, its currency loses value in the currency exchange rate.

The fluctuating oil prices in the few past years are a good example of what can happen when factors affect the price and supply of oil. Remember from basic economy courses that higher oil prices act to put the brakes on consumer spending. This will be true as long as the major source of oil for industrialized countries is petroleum based. The price of all goods produced hinges on the price of a barrel of oil. If the oil prices rise, so do production and supply prices for most consumer goods. In addition, the expenses of individual consumers rise as they pay more to fuel their automobiles and heat their homes. The net result is a downward swing in the economy of the country until it hits a rallying point that starts it back on an upward trend.

Experts who watch the oil market are split on which way oil prices are headed, and just how far. A few years ago, most investors agreed that $40 a barrel was the upper limit for a barrel of crude oil. Months later, oil had already broken that point, and was selling at $42.50 a barrel. The effects of the weather, world politics and actual capacity to meet demands have fueled one of the most volatile pricing years in recent memory. At one point, the price of crude broke $70 a barrel, an increase of 65% over the beginning of that year. And while prices dropped for a short period, at the end of that year, they were still 45% higher than at the beginning of the year. At the beginning of the next year, prices have begun their climb again, and the majority of traders believed that we won’t see a reversal of that trend in the near future. The conservatives predicted a price of $80 per barrel. The more aggressive are calling it at $100.

What does this mean for the currency trading market?

In the currency market, exchange rates are often predicated on the health of a country’s economy. If the economy is robust and growing, the exchange rates for their currency reflect that in higher value. If the economy is faltering, the exchange rate for their currency against most other currencies also stumbles. Knowing that, the following makes sense:

1. The currency of countries that produce and export oil will rise in value.

2. The currency of countries that import most of their oil and depend on it for their exports will drop in relative value.

3. The most profitable trades will involve a country that exports oil vs. a country that depends on oil.


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