• 1 day PDVSA Booted From Caribbean Terminal Over Unpaid Bills
  • 1 day Russia Warns Ukraine Against Recovering Oil Off The Coast Of Crimea
  • 1 day Syrian Rebels Relinquish Control Of Major Gas Field
  • 2 days Schlumberger Warns Of Moderating Investment In North America
  • 2 days Oil Prices Set For Weekly Loss As Profit Taking Trumps Mideast Tensions
  • 2 days Energy Regulators Look To Guard Grid From Cyberattacks
  • 2 days Mexico Says OPEC Has Not Approached It For Deal Extension
  • 2 days New Video Game Targets Oil Infrastructure
  • 2 days Shell Restarts Bonny Light Exports
  • 2 days Russia’s Rosneft To Take Majority In Kurdish Oil Pipeline
  • 2 days Iraq Struggles To Replace Damaged Kirkuk Equipment As Output Falls
  • 2 days British Utility Companies Brace For Major Reforms
  • 2 days Montenegro A ‘Sweet Spot’ Of Untapped Oil, Gas In The Adriatic
  • 3 days Rosneft CEO: Rising U.S. Shale A Downside Risk To Oil Prices
  • 3 days Brazil Could Invite More Bids For Unsold Pre-Salt Oil Blocks
  • 3 days OPEC/Non-OPEC Seek Consensus On Deal Before Nov Summit
  • 3 days London Stock Exchange Boss Defends Push To Win Aramco IPO
  • 3 days Rosneft Signs $400M Deal With Kurdistan
  • 3 days Kinder Morgan Warns About Trans Mountain Delays
  • 3 days India, China, U.S., Complain Of Venezuelan Crude Oil Quality Issues
  • 3 days Kurdish Kirkuk-Ceyhan Crude Oil Flows Plunge To 225,000 Bpd
  • 3 days Russia, Saudis Team Up To Boost Fracking Tech
  • 4 days Conflicting News Spurs Doubt On Aramco IPO
  • 4 days Exxon Starts Production At New Refinery In Texas
  • 4 days Iraq Asks BP To Redevelop Kirkuk Oil Fields
  • 5 days Oil Prices Rise After U.S. API Reports Strong Crude Inventory Draw
  • 5 days Oil Gains Spur Growth In Canada’s Oil Cities
  • 5 days China To Take 5% Of Rosneft’s Output In New Deal
  • 5 days UAE Oil Giant Seeks Partnership For Possible IPO
  • 5 days Planting Trees Could Cut Emissions As Much As Quitting Oil
  • 5 days VW Fails To Secure Critical Commodity For EVs
  • 5 days Enbridge Pipeline Expansion Finally Approved
  • 5 days Iraqi Forces Seize Control Of North Oil Co Fields In Kirkuk
  • 5 days OPEC Oil Deal Compliance Falls To 86%
  • 5 days U.S. Oil Production To Increase in November As Rig Count Falls
  • 6 days Gazprom Neft Unhappy With OPEC-Russia Production Cut Deal
  • 6 days Disputed Venezuelan Vote Could Lead To More Sanctions, Clashes
  • 6 days EU Urges U.S. Congress To Protect Iran Nuclear Deal
  • 6 days Oil Rig Explosion In Louisiana Leaves 7 Injured, 1 Still Missing
  • 6 days Aramco Says No Plans To Shelve IPO
Alt Text

Aggressive OPEC Pushes Oil Prices Up

Oil prices are once again…

Alt Text

Oil Shows Weakness, But Don’t Expect A Plunge

Oil prices remained firm this…

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

Petro Currencies Under Fire As Oil Keeps Sliding

Petro Currencies Under Fire As Oil Keeps Sliding

Low oil prices put pressure on the budgets of major oil producing countries in 2015, but the next domino to fall could be their currencies.

Petro-economies with flexible exchange rates have already seen double-digit declines in the value of their currencies over the past year, in percentage terms. But with crude now at 11-year lows, pressure is also mounting on a range of currency pegs. The futures contract for the value of the Saudi riyal, which has been pegged to the dollar for three decades, hit a 16-year low. While Saudi Arabia has no plans to ditch its currency peg, at least officially, the markets are starting to bet that the country won’t be able to maintain the peg due to budgetary pressures and dwindling foreign exchange reserves.

Low oil prices have blown a massive hole in the Saudi budget. For now, Saudi Arabia has chosen a path of austerity in order to try to address the problem. It revealed a budget that calls for reforming fuel subsidies, raising taxes, and lower spending. But for a government that is keen to maintain social stability, slashing public expenditures is not really something it can lean on too much. Related: BP’s CEO Finally Sees Oil Prices Bottoming Out

With its oil market strategy a priority at the moment, ruling out an effort to significantly increase oil prices through production cuts, the only other option to fix its budget deficit is to abandon its currency peg. The Saudi riyal has been pegged at 3.75 to 1 U.S. dollar, but the futures market sees one-year contracts at 3.82, a 16-year high. Commerzbank AG says the peg is no longer sustainable. “Markets clearly no longer believe that the USD-SAR peg is durable,” Peter Kinsella, an analyst at Commerzbank, concluded. “If they did, then forwards would not diverge from spot prices to any large extent.”

But a currency devaluation carries its own risks. Imports become more expensive. Inflation becomes more of a worry. Dollar-denominated debt becomes vastly more expensive to deal with. “Speculation over a devaluation of the Saudi riyal has mounted in the past few days but we think such a move is likely to be used as a last resort,” Jason Tuvey, Middle East economist at Capital Economics, told The Wall Street Journal. “In light of the potential political ramifications, this is something that the authorities will be extremely keen to avoid."

Relared: Oil Companies Shun South China Sea As Geopolitical Tensions Rise

Meanwhile, Saudi Arabia is now engaging in a diplomatic spat with Iran. While it is likely to remain a war of words, it remains a crucial conflict for domestic political reasons. It is hard to imagine the Saudi government undertaking a currency devaluation while dealing with such a delicate situation.

But Saudi Arabia is only one, albeit one of the most prominent, countries facing currency pressure. Nigeria is another oil-producer that could be forced to devalue its currency. For now, Nigerian President Muhammadu Buhari opposes such a move, but he has softened his language on the issue as of late.

Christine Lagarde, Managing Director of the IMF, recently said that Nigeria should look at “added flexibility in the monetary policy” in order “to support the poor people of Nigeria,” especially if oil stays lower for longer. “Clearly, the authorities should not deplete the reserves of the country simply because of rules that could be exceedingly rigid,” Lagarde said. “I’m not suggesting that rigidity be entirely removed, but some degree of flexibility will be helpful.” Lagarde’s use of “flexibility” is jargon for loosening the fixed exchange rate, which would lead to a currency devaluation. Related: Peak Oil Production Is Still Years Away

Adding to the problem of declining currencies from commodity producers if the fact that emerging markets have lost their luster as the most attractive investment vehicles for global capital. China’s slowing economy is adding to concerns that the world’s growth engine is starting to slip away. As such, China’s yuan has hit a five-year low as its economy continues to slow. The Brazilian real and the Turkish lira fell another 2 percent at the start of 2016 on fears of emerging market turmoil. Canada, another major oil producer, has seen its currency dip to a 12-year low.

The U.S. dollar has strengthened both because of a pullback in monetary policy from the U.S. Federal Reserve and also because the dollar acts as a safe haven during times of instability. With Brent falling below $35 for the first time in 11 years in intraday trading on January 6, global finance will continue to flee petro currencies in the early part of 2016.

By Nick Cunningham of Oilprice.com

More Top Reads From Oilprice.com:

Back to homepage

Leave a comment
  • Christian on January 06 2016 said:
    Curious if Ecuador is doing better because it uses the US dollar as its official currency.

Leave a comment

Oilprice - The No. 1 Source for Oil & Energy News