The surge in natural gas prices was in the spotlight last autumn. Between early March and mid-December, the spot market price increased more than tenfold. Apart from making for substantially higher energy bills in 2022, this price movement also caused several energy companies to go head-to-head. Since the start of the new year, however, the rise in oil prices has been taking the lead in the energy world. The price of a barrel of Brent oil traded at over $88 on Wednesday. The same barrel cost around $55 at the beginning of last year. And at the peak of the corona panic in March 2020, it was only just over $20.
Notable share price movement
A strong move in the price of oil often has an effect on the currency world. This time is no different, but the effect is quite different from what you might think. Saudi Arabia, as the world's largest oil exporter, has pegged the value of the riyal to that of the dollar, so this currency does not produce fireworks. With exports of around 4.5 million barrels a day, Russia comes second in the export rankings. However, despite the substantially higher oil price, the value of a rouble has fallen to less than 13 US cents. At the end of October, the currency was still worth over 14 US cents. The exchange rate fall is a result of both a prominent cause and a major consequence of the oil rally.
Matter of supply and demand
The tightness in the oil market is a sum of many factors. For instance, demand is somewhat higher than expected. This is because more and more countries - such as Britain - are choosing to jettison lockdown measures. On the supply side, recent production problems included Libya, Ecuador, Nigeria and Malaysia. Worries about oil supply in 2022 were fuelled this week by a drone attack by Houthi rebels on an oil facility in Abu Dhabi. But the main cause of geopolitical turmoil is, of course, the threat of a Russian invasion of Ukraine. Time is running out for Russia to flex its military muscle.
A big mud puddle
When spring weather soon sets in, Ukraine's countryside will turn into a huge mud puddle in which Russian tanks and troops could get quite bogged down. If President Vladimir Putin chooses to invade his neighbour anyway in the near future, Western countries will undoubtedly impose very strict sanctions. That will put pressure on the rouble. Incidentally, the current weakness of the Russian currency is also the strength of the dollar. The US currency has the wind at its back from the prospect of a series of interest rate hikes in 2022. By doing so, the Federal Reserve aims to curb inflation, which is ramping up partly because of rising energy prices. The rouble will only really benefit from higher oil prices once the US interest rate hikes are over and fears of an invasion of Ukraine have subsided.
Joost Derks is currency specialist at iBanFirst. He has over 20 years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.
