Oil, forecasts and the Forex Market

What can be said about forecasts? Use actual and future market trends with available data and facts to forecast. Analysts trust technical and fundamental statistics to predict the direction of the economy, the stock market and individual stocks.

Why should you worry about oil prices if you are not buying or selling oil? If you trade currencies, there is a good reason to take this price into account. The prices of many negotiable currency pairs rise or fall according to the price of the oil barrel.

Oil price has been one of the main indicators of world’s economy for decades, and experts estimate that this is not going to change short term. The connection between oil prices and the economy of several countries is based on a few simple facts:

• The economies of the countries which have good crude oil reserves benefit when the oil prices rise.
• The countries that depend on imports to satisfy their energy needs benefit from the fall in oil prices and are harmed when those rise.
• When the economy of a country is strong, its currency is also strong on the Forex market.
• When the economy of a country shrinks, the exchange rate of its currency loses its value.
  

The opinions of experts who analyze the oil market differ upon the direction that oil prices are taking, and upon how long will that trend continue. Some time ago, the majority of experts agreed that a price of $40 per barrel was the highest price that could be paid for a crude oil barrel. Later on, oil had already risen above that barrier and was being sold at $42,50 per barrel. Climate quirks, world’s politics and the real capacity to accommodate the demand have contributed to one of the most volatile years that we can remember as to prices.

At a certain point, the price of the crude oil barrel went above $140, which was a huge increment proportionally to what it was at the beginning of that year. And though the prices fell thereafter during a short period, at the end of the year they were still 45% higher.

Prices are now again on the rise though with a less pronounced curve, and the majority of traders believes there isn’t going to be a reversal of that trend on short term. The more conservative forecast that the oil barrel price will set at around $80, where it is trading presently, while the more intrepid estimate that it will reach again $100.

The fluctuation in oil prices is a good example of what can happen when there are factors that have an influence on oil prices and supply. Higher oil prices slow down consumer spending. This will still be true as long as oil remains the most important source of energy of industrialized countries.

The prices of all produced goods depend on oil barrel price. If oil rises, the
costs of production and of most supplies for consumer goods also rise. Furthermore, individual consumers expenses increase as they have to pay more to supply fuel to their automobiles and heat their homes. The net result is a down-sided fluctuation for the country’s economy, until it gets to a recovery point where the bullish trend starts again.

What are the consequences of all this for the currency markets?

In the currency markets, the exchange rates are often based on the health of a country’s economy. If the economic situation is strong and is growing, the exchange rates of its currency will show this through a higher price. If the economy is weak, their currency exchange rate falls in relationship with the majority of other currencies. Once we know this, the following makes sense:

• The value of the currency of the countries that produce and export oil will increase.
• The relative value of the currency of the countries that import the greatest part of the oil they consume and which imports depend on it will fall.
• The most profitable transactions will be related to countries that export oil vs. countries that depend on it.

On the basis of those three points, experts are considering CADJPY (Canadian dollar vs. Japanese Yen) as the pair which can yield the most profitable trades, and this is the reason why:

Canada has been escalating positions on the world oil producers list for years, and is presently the ninth most important oil exporter. Since year 2000, Canada has become the biggest oil supplier of the United States, and has been getting considerable attention from the Chinese markets. It had been forecasted that in this year 2010, China needs for oil imports would double, and it is said that they will be equivalent to those of the United States for year 2030. Presently, Canada is lining up as the bigger exporter of oil to China. This places Canada in an excellent position from a trading perspective. On the contrary, Japan imports 99% of the oil it consumes. Its dependence upon oil imports makes its economy too much sensitive to oil prices fluctuation. If oil prices keep on the rise, Japanese export prices will also be forced to increase, and this would weaken their position on the international markets. In the last years, there has been a close relationship between oil price rises and Yen falls.

If we take into account what economy and history tells us, oil prices cannot keep on rising indefinitely. In the end, consumers will tighten their belts and will start reducing their demand of oil and gas. When this happen, the price of oil will either stabilize or will start falling back to the $40 which had been forecasted as impossible by the experts.

As you can see, there are many factors that can have an incidence on the Forex scene. It is better to leave speculations to the experts, unless you trade Forex as a hobby.