The relationship between commodities and FX is a dynamic one. It’s certainly one worth studying, simply because of the parallels that we can draw from a logic perspective between how commodity prices change and the reflection we then expect to see in currencies.
Oil has been one of the biggest discussion topics, particularly in the recent past as we’ve seen its price fluctuate heavily due to three factors pulling in different directions -> OPEC +, the Delta variant and Hurricane Ida.
The graph above shows Crude Oil prices, with the August prices highlighted by the white box. We can see significant fluctuation, with the price falling as far as 15.88% below the August 1st opening price, before closing at 6.90% down on the 31st.
The chart appears to be defined into two distinct sections, a steep fall until the 20th August (Friday), followed by a recovery from the 23rd (Monday) onwards.
As the Delta variant continues to move with speed through the US, demand for transportation is continuing to struggle. Fear is the primary driver here, particularly due to the effect this variant also appears to have on vaccinated individuals (albeit still being an improvement on the conditions of those unvaccinated). The lack of demand for transportation or general travel has a knock-on effect on fuel, hence fuelling the drop in oil prices.
This is further driven by the actions of OPEC+, a group containing the 14 Organization of Petroleum Exporting (OPEC) members and 10 other non-OPEC members. It was as early as mid-July this year that OPEC+ decided to increase its supply of oil and it was agreed that this strategy would continue for the rest of the year in early August. This is a significant agreement that we need to be aware of, because it shows an active effort from global economies to push the supply side of the equilibrium, at least for the immediate future.
Naturally, there are bumps along every road and Hurricane Ida has in fact turned into far more than that. The hurricane was initially identified by the National Hurricane Center (NHC) on the 23rd August and since then it has left devastation in its wake, ripping through New Orleans and spreading as far as New York where there has been severe flooding.
The South of the US is the major source of the country’s oil and its therefore understandable that natural disasters have caused a fall in the production. This is supply driven inflation, where the lack of oil has caused prices to jump and make up a significant part of the loss that they experienced at the start of the month.
Oil will continue to be an intriguing asset in September. Prices might continue to rise in the near future, especially over the next few weeks as the recovery from Ida continues. The over-arching direction however, appears to be down, as the recent OPEC+ announcements show a clear intention that an increase in supply is the favoured path for the rest of the year.