• 4 minutes Will We Ever See 100$+ OIL?
  • 8 minutes Iran downs US drone. No military response . . Just Destroy their economy. Can Senator Kerry be tried for aiding enemy ?
  • 11 minutes Energy Outlook for Renewables. Pie in the sky or real?
  • 2 mins Iran Loses $130,000,000 Oil Revenue Every Day They Continue Their Games . . . .Opportunity Lost . . . Will Never Get It Back. . . . . LOL .
  • 18 hours Shale Oil will it self destruct?
  • 1 day Berkeley becomes first U.S. city to ban natural gas in new homes
  • 1 day Iran Captures British Tanker sailing through Straits of Hormuz
  • 11 hours Renewables provided only about 4% of total global energy needs in 2018
  • 2 hours EIA Reports Are Fraudulent : EIA Is Conspiring With Trump To Keep Oil Prices Low
  • 2 days Drone For Drone = War: What is next in the U.S. - Iran the Gulf Episode
  • 2 days Today in Energy
  • 15 hours Oil Rises After Iran Says It Seized Foreign Tanker In Gulf
  • 3 days Mnuchin Says No Change To U.S. Dollar Policy ‘As of Now’
  • 3 days Populist, But Good: Elizabeth Warren Takes Aim at Private-Equity Funds
  • 2 days LA Solar Power/Storage Contract
  • 2 days Why Natural Gas is Natural
Alt Text

Clean Energy Acquisitions Pick Up

The fear of a new…

Alt Text

It’s Sink Or Swim For U.S. Shale

Cracks are emerging in the…

Alt Text

Oil Plunges As Iran Conflict Cools

Oil prices plunged by 4…

Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

More Info

Premium Content

Emerging Market Contagion Threatens Oil Market

The emerging market currency crisis is not over yet, and could yet morph into a broader contagion that threatens to drag down oil demand.

Last week, Argentina’s peso fell by around 20 percent in just a few days, taking year-to-date losses over 50 percent. The central bank frantically hiked interest rates from 45 to 60 percent in an effort to stem the losses, hoping to halt the peso’s spiraling descent. The peso regained a bit of ground, but now trades at over 37 pesos to the dollar, compared to 27 pesos per dollar in early August and 18 pesos at the start of the year.

This may seem like a problem for Argentines, but the currency turmoil is indicative of a broader malaise sweeping over emerging markets. A whole range of currencies have lost ground this year, rattling financial markets and forcing central banks to hike interest rates.

Another way of saying the same thing is that the dollar has strengthened on the back of rate tightening from the U.S. Federal Reserve, which has battered currencies across the globe. This underscores a deeper problem with the global economy: After a decade of near-zero interest rates, how does the U.S. central bank withdraw extraordinary monetary stimulus without wreaking havoc on the global economy?

The stronger dollar hits emerging markets in several ways. First, it directly knocks down emerging market currencies in terms of their value against the dollar. But, from there, the problem gets worse. A weaker currency makes dollar-denominated debt in these countries much more expensive and much harder to pay off. That can slow down the economy because businesses have to cut back, consumers have trouble paying off debt, the risk of default rises and everything slows down. Add to that the fact that governments need to guard against macroeconomic instability, which is to say, governments have to slash spending and central banks have to hike interest rates in order to staunch the outflow of capital, rein in inflation and defend their currencies. Economists argue these orthodox policies can right the ship, but they come with a cost. Related: The Bearish Case For Oil

“A fiscal adjustment shock,” Goldman Sachs economist Alberto Ramos wrote in a note, is “the antidote for the market’s lost confidence.” But, of course, austerity and higher interest rates tend to deepen the economic downturn, at least in the near-term. Just ask anyone in Greece if they prefer the “antidote” of a decade of austerity. The cure feels just as bad as the disease.

Currency problems have become increasingly visible across the world, with Turkey and Argentina only the most obvious. Brazil, India, South Africa, Indonesia, Russia and even China have seen their currencies take a hit. Brazil’s real and South Africa’s rand both have fallen by 10 percent over the past month while Argentina’s peso and Turkey’s lira have plunged by a third over the same timeframe.

And, in the case of Argentina, it’s instructive to remember that currency and financial crises can arise rather quickly. Even the $50 billion IMF rescue package from earlier this year has not been enough, and in fact, the recent plunge in the peso came after Argentine President Mauricio Macri said that he would seek to accelerate the use of the $50 billion credit line rather than have it come in phases over the next few years. That sparked a rapid deterioration of the peso.

The plunging value of the peso is causing problems for the energy industry in Argentina, where wellhead prices are in dollars but domestic sales are conducted in pesos. Related: Russia’s Oil Companies Thrive Amid Sanctions

The currency disruptions in such disparate parts of the world are starting to resemble a broader contagion, although plenty of analysts still doubt that the problems in Turkey and Argentina will spread and grow. In fact, some argue that beneath the severe currency trouble in a handful of countries are a raft of unique problems that have nothing to do with a broader financial contagion. “You look at the five worst [performing] currencies this year – Argentina, Turkey, Brazil, South Africa, Russia – they all have a huge amount of baggage that is very much idiosyncratic to themselves,” Win Thin, the global head of emerging markets strategy at Brown Brothers Harriman, told CNBC. The conclusion then, Thin argues, this is a down period for emerging markets, but it doesn’t represent a broader threat to the global financial system.

Moreover, if the U.S. Fed decides to hold off on further interest rate hikes, or delay its timetable, that could provide a lot of relief to currencies around the world, easing the crisis. But whether or not the central bank takes that route remains to be seen.

Still, there are enough economic headwinds to slowdown many emerging market economies, even if the financial system manages to avoid a more serious financial contagion. The upshot for the oil market is that demand will likely need to be revised lower. A general emerging market slowdown will crimp demand by itself, but currency trouble will magnify the effect. Because oil is priced in dollars, the severe drop in currencies makes oil incredibly expensive, so consumption takes a big hit. We may get our first official glimpse at demand forecasts from the IEA next week when the agency releases its September Oil Market Report.

By Nick Cunningham of Oilprice.com

More Top Reads From Oilprice.com:

Download The Free Oilprice App Today

Back to homepage

Leave a comment

Leave a comment

Oilprice - The No. 1 Source for Oil & Energy News
Download on the App Store Get it on Google Play