Are Petrocurrencies Heading For Extinction?

Authored by Irina Slav via OilPrice.com,

Petrocurrencies are breaking away from their traditional tight link to oil prices, but all it would take for this link to return is for prices to fall bellow their current range. This seems to be the general consensus among bankers interviewed by Bloomberg’s Natasha Doff and Anna Andrianova.

The change is especially obvious with the Russian ruble, the Norwegian crown, and the Canadian dollar. The ruble’s response to the recent string of gains in oil prices was muted; the Norwegian crown barely batted an eyelash at latest price changes; and the Canadian dollar has weakened despite the oil price movements.

It seems there are two factors determining this break between the most-traded commodity in the world and its largest producers: one, interest rates; and two, the price range of oil. Russia, for example, offers high real yields for investors, which has made the ruble more attractive despite weaker oil prices over the last two years. Even a recent interest rate cut of 25 basis points to 8.25 percent didn’t discourage forex traders from buying the Russian currency, Doff and Andrianova note.

The situation isn’t much different in Canada: Ever since June, when the central bank raised interest rates for the first time in seven years, the correlation between the Canadian dollar and crude oil has weakened. This, analysts note, highlights the growing importance of central bank policy compared with the significance of the oil industry for the state budget in each of these countries.

Norway is awaiting an interest rate increase, but it has booked stronger-than-expected economic growth, which has helped weaken the link between the crown and oil. Still, like the ruble and the Canadian dollar, the crown is likely to suffer if a sharp drop occurs in oil prices, as all commodity-related currencies are more sensitive to downward movements in the commodity’s price than to price increases.

The message from bankers and commodity analysts seems to be that it’s too early to celebrate a complete break between oil and the currencies of its biggest producers, but the link between them has certainly weakened and frayed.

Traditionally, petrocurrencies fall when oil prices fall, as this signals a decline in demand for the commodity. This time, oil demand is relatively strong and it is supply that is the reason for the low prices, which explains the limited effect of the price changes on the currencies. At the same time, only the mention of a possibility for weakening oil demand would be enough to cause a price drop, and if other factors emerge and this drop is below $40, petrocurrencies will be hurt. 

China, for one, doesn’t seem to care about this still-present link between currencies and oil prices. It is actively seeking to turn its own yuan into a sort of petrocurrency. The second-largest consumer (and now the top importer) of crude is now trying to persuade OPEC’s kingpin and biggest exporter, Saudi Arabia, to start accepting yuan for its crude oil. If the Chinese succeed, other oil exporters could follow suit.

On the other hand, there’s an enthusiastic—and in some cases frantic—diversification drive among oil producing nations, and depending on its degree of success, this would only further weaken the link between their currencies and oil prices.

Comments

LawsofPhysics koan Thu, 10/26/2017 - 09:45 Permalink

The ongoing capital and resource mis-allocation and mal-investment is orders of magnitude larger than anything that has ever happened before......the cryptocurrencies are definitely one example and I hypothesize that they are acting as somewhat of a "pressure release valve".  What I don't know is which winners and losers the government is going to pick...Technically, thanks to electronic credit cards, paypal, etc. humans have been conditioned to electronic "money" for a long time already.  No question cryptos will survive.  Again the question now is which one will you be required to pay taxes with?Governments sure as hell are NOT going away..."Full Faith and Credit"

In reply to by koan

LawsofPhysics Thu, 10/26/2017 - 09:40 Permalink

Yes. Unlike the social science that is eCONomics, the biosphere called earth is really only subject to the laws of physics and Nature.  In addition to these currencies, the infinite growth paradigm is also dead, the majority of humans simply don't know it yet..."Full Faith and Credit"same as it ever was...

Ghordius Thu, 10/26/2017 - 09:40 Permalink

"Even a recent interest rate cut of 25 basis points to 8.25 percent didn’t discourage forex traders from buying the Russian currency, Doff and Andrianova note. "true, but that's because investments in "Russia Inc." are still quite profitable (but a bitch to manage/do in the first place). not because of the Ruble. in fact, how are prices going? a bit better then before, but do you remember when prices were going up 18% per year?

The Greek horse Thu, 10/26/2017 - 09:43 Permalink

As a Professional FX trader ZH is right there are no correlations with CAD or AUSSIE , KIWI ( BIG OIL PRODUCERS with good spreads) sometimes it even has an opposite reaction.

JailBanksters Thu, 10/26/2017 - 09:52 Permalink

If the Secret Space Program is real, and there's a lot of circumstantial evidence to suggest it does,then Petrol is obsolete. And should have been for more than 50 years.

chickadee Thu, 10/26/2017 - 10:15 Permalink

What a horse shit headline. Article talks about limited influence of oil prices on the currencies; yet headline says they are going "extinct".

Kayman Blue Dog Thu, 10/26/2017 - 11:25 Permalink

The death of the Petrodoller, if it happens, will hurt oil producers far more than it is going to hurt the U.S.  The USD is ubiquitous- you can go anywhere on the planet with a fistfull of USD cash and buy nearly anything.  Try getting a local vendor to take Rubles or Yuan in any country other than Russia and China.A lot of huffing and puffing about fuck-all.

In reply to by Blue Dog

ThinkAgain Thu, 10/26/2017 - 11:13 Permalink

When the central banks of nations start to BCS/BQE the only demand in the market will be a) existing contracts/loans denomitated in USD plus b) USA debt. BCS/BQE goes much more further than petrocurrency: it facilitates trade at large. Plus: it's an open system (block chain open ledgers) and therefore accessible and auditable for everyone. See http://www.planck.org/publications/BQE-Bilateral-Currency-Swaps. All in USD denominated paper will lose it value when the global demand for USD tanks. Dehubbing the world. Also monetary. It is bound to be happen. Centrifugal power. In 1971-1973 they fixed it (closing gold window, issuing huge dollar loans abroad). Now they will try to fix it by integration of the EUR. See http://www.planck.org/publications/Global-West-Common-Currency-Union.

rf80412 LawsofPhysics Thu, 10/26/2017 - 12:23 Permalink

"Useless eaters" aren't useless if they represent demand for your product.  The problem is that for one reason or another, they can't afford to be your customers unless someone gives them money to spend, or borrows/creates money to spend on them.But you're right that these people don't consume financial products, and so are indeed useless eaters as far as the largest and most profitable sector of the economy is concerned.  Since wages decoupled from productivity in the 1970s, we're all stuck in a vicious circle of cheapening and surplusing labor in the name of forcing production costs down in order to spur consumption by an ever-poorer population.  Lenders are of course happy to help out, since our debts are income-producing assets to them.

In reply to by LawsofPhysics

JailBanksters Thu, 10/26/2017 - 19:26 Permalink

I think it's going to be based on the BulletDollarAfter all, it is the USA that exports more Weapons to more countries than anybody else, including every country in the Middle East.Then the US has to invade them because they have weapons and to bring stability.