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Oil and currency markets reflect expectations for low economic growth

Hydrocarbon Engineering,

According to the US Energy Information Administration (EIA), since August both crude oil and currency markets have been influenced by lower economic growth expectations in countries outside the US. Prices in both markets recently broke out of established trading ranges, driven by concerns about weaker future global demand. The current situation, with the dollar index and oil prices moving in opposite directions, presents a sharp contrast to one in which crude oil supply disruptions or geopolitical risks would cause both the dollar index and crude prices to rise.

Although the US economy showed robust growth in the third quarter of 2014, recording an estimated 3.5% growth rate, economic data from Europe and China have led to expectations of potentially weaker demand for crude oil. Eurozone gross domestic product (GDP) growth was 0.2% in the third quarter, and inflation was low at 0.3% and 0.4% in September and October, respectively. In China, third quarter GDP growth was 7.3%, the lowest annual growth rate since first quarter 2009.

The divergence of growth expectations between the US and the rest of the world is also reflected in currency markets. As economic growth slows in countries other than the US, it increases the likelihood that their central banks will implement further steps to stimulate growth, like the recent announcement of rate cuts and quantitative easing by the European Central Bank and the Bank of Japan. In the US, stronger economic growth led the Federal Reserve to end its quantitative easing program and raises the possibility of increases in interest rates next year. These opposing shifts in monetary policy had the combined effect of increasing the value of the US dollar against other world currencies (as measured by the US dollar index) by 8.1% from 1 August – 17 November.

Adapted from a press release by Emma McAleavey.

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