Oil Prices Take a Slump: Here are 5 Key Takeaways

3 min read

There’s no doubt that oil is a valuable resource that countries cannot survive without. Machines utilize it in order to operate and, hence, invariably keep the wheels of commerce spinning.

Apparently, there’s some truth to the fact that oil has become the “black gold” of sorts which has some countries wage war against others to secure control of vast oil fields.

Going beyond its ability to instigate international conflicts, oil is also an important economic driver which people can’t imagine a world without it. Sadly, oil is a finite resource and unbridled consumption will eventually lead to a dearth in the global supply of fuel. But while we’re still far from a Mad Max scenario that’s very much likely to happen, we can still feel the negative effects of a finite resource that is more or less nearing depletion.

That said, global oil prices have been experiencing an ebbing and flowing for the past couple of years. Despite the existence of technologies such as fracking, it’s still no surprise that global prices are beginning to weigh down on consumers.

But what does this have to do with FOREX traders? Sure enough, a slump in oil prices can cause significant changes to the market dynamics of FOREX trading. So to answer the question “Does oil trade affect exchange rates?,” the answer is simply YES!

Let’s look at a few key takeaways:

There’s correlation with economic activity

No doubt, having a surplus stock of oil guarantees economic security. Oil-rich nations in the Middle East and North Africa tend to generate greater wealth since they don’t have to depend on imports to get their daily stock of fuel. Moreover, countries endowed with this resource tend to borrow less, which in turn allows their currency to appreciate. This benefits the domestic economy in very significant ways and spurs market growth that further strengthens the local currency.

There are better trade partnerships

In certain ways, dependency on local oil supplies creates opportunities for the domestic economy to grow. If a country is able to produce oil, it has a higher export value compared to those that have to depend on other countries for importations. Sure enough, countries that are 100% dependent on oil imports tend to be highly vulnerable to price changes and are often placed on a difficult position to ask for better trade deals.

There is better bargaining power

Given that oil is a valuable resource, countries that have it tend to exercise far-reaching economic clout. In other words, those who control the oil are in a way better position to define and influence certain markets, more importantly the FOREX market which is highly dependent on the economic health as a gauge in assessing the actual value of a certain currency.

All things considered, FOREX traders should be wary of any fluctuations in the global price for oil. Slight differences can mean big changes in the value of some currencies, which is something traders should not ignore.