fall of oil prices Will Impact Currencies
On 29th, September 2016 OPEC nations met and decided to cut oil production. The decision was made as an effort to curtail the fall of oil prices. Oil prices have been falling steadily over the past two years. The reduction has negatively impacted economies of oil producing countries. Saudi Arabia’s largely middle-class population has had to bear with a reduction in subsidies as a result. OPEC nations will meet on November 30th, 2016 to coordinate how oil production will be reduced. The meeting is widely expected to come up with cuts for each oil producing nation, both OPEC and non-OPEC COUNTRIES.
Russia a non-OPEC country is likely to be forced to reduce production by about 250,000 barrels per day. This cut is likely to play a role in the Ruble’s value in the next six months. It will be a good thing for Russia’s economy. The Ruble responds well to oil prices. If oil prices shoot up, the ruble will ride to its highest value in the last two years. However, some pundits warn that Russia is unlikely to agree to the decrease partly because the country already plans to up its oil production next year. If Russia refuses, who is left?
Azerbaijan is another oil-producing non-OPEC country. Azerbaijan could cut its production by as much as 800,000 barrels per day. Azerbaijan’s Manat is one of the most volatile currencies. In the short-term, the cut will affect the country’s economy and its currency negatively. However, should oil prices respond favorably as they are likely to do in the coming months, the manat’s value is going to increase in value.
Venezuela is the country with the highest number of oil reserves in the world. 95% of this country’s revenues come from oil. Venezuelan economy has taken the hit in the past year due to low oil prices and the country’s politics. Food has been scarce and people have held demonstrations against the government. Venezuela has been calling for oil production to be cut. The Venezuelan bolivar, at this point it is almost worthless. The equivalent of $1 is about 10,000 bolivar. Whether an increase in oil prices in the coming months is going to help the bolivar gain a footing remains to be seen.
Iran is the third largest producer of oil among OPEC countries. Industry experts argue that OPEC’s September deal is as good as dead if Iran doesn’t sign on it. The Iranian rial is tightly controlled by the government’s central bank. Infarct, it is not yet a convertible currency and is not even on the interbank foreign exchange market. The impact of the oil production cut on the Rial is expected to be modest.
Saudi Arabia’s economy depends on oil production. 80% of the budget is funded by oil revenues. Oil also accounts for the largest share of exports. Saudi’s Riyal is unlikely to gain from the oil cut. This is because the currency is tightly regulated by the government. Where the Saudi’s government will make cuts in other areas of the economy to prevent volatility.
If OPEC agrees on an implementation strategy on Nov 30th, economies of oil-producing nations will be boosted significantly. The value of the ruble, manat and bolivar could gain from this decision. Iran’s rial and Saudi’s Riyal are unlikely to gain from the cut.