LogoLogo
Logo
Logo
Academy
Basic knowledge
Trader's kit
About us
Log in

Learn Trading for Free and Without Registration

An Online Glossary to Study Trading Independently

Why Is Oil Called "Black Crack"? Connection Between Oil, Currencies

The Connection Between Oil, Currencies, and the Global Economy: How Oil Influences Major Pairs

 

Crude oil, often referred to as "black gold" or even "black crack," plays a pivotal role in the global economy. Why is it called "black crack"? Because oil acts as an "addiction" for the global economy—without it, modern life as we know it would grind to a halt. It powers industries, transportation, energy infrastructure, and even geopolitical influence.

Why Is Oil Called "Black Crack"?

Oil creates a significant dependency for both importing and exporting nations:

  1. Energy Dependency: Oil is a primary source of fuel for transportation and electricity generation.
  2. Industrial Dependency: It is a key raw material for producing plastics, chemicals, and other essential products.
  3. Financial Dependency: Many oil-exporting nations rely heavily on oil revenue to fund their economies.

When oil prices rise, economies dependent on oil imports face increased costs, while oil-exporting nations benefit from higher revenues. Any fluctuation in oil prices can have widespread economic and financial consequences.

The Impact of Oil on Currencies: Key Dependencies

1. Canada and the Canadian Dollar (CAD)

Canada is one of the largest oil exporters globally, with a significant portion of its exports going to the United States.

  • When oil prices rise, the Canadian dollar (CAD) tends to strengthen due to increased export revenues.
  • As a result, the USD/CAD pair often has an inverse relationship with oil prices: rising oil prices typically lead to a declining USD/CAD pair.

Example:
If oil prices increase, Canada’s export revenues grow, driving demand for CAD and boosting its value against the USD.

2. Russia and the Russian Ruble (RUB)

Russia is another major oil exporter, with oil revenues forming a significant part of its national budget.

  • Rising oil prices generally lead to a stronger ruble.
  • Falling oil prices weaken the ruble and can cause economic challenges, such as budget deficits and inflationary pressures.

3. Saudi Arabia and OPEC Countries

Countries within the Organization of the Petroleum Exporting Countries (OPEC), such as Saudi Arabia, heavily depend on oil revenues.

  • Higher oil prices enable these nations to fund domestic projects and maintain budget stability.
  • Lower oil prices can lead to budget cuts, social unrest, and currency devaluation.

4. Norway and the Norwegian Krone (NOK)

Norway is a developed nation with a strong dependency on oil exports.

  • Rising oil prices boost the Norwegian krone (NOK), as increased export revenues strengthen the currency.
  • Falling oil prices weaken the NOK, potentially impacting the broader Norwegian economy.

Oil Market Cycles and Their Impact on Currencies

The oil market operates in cycles, and these fluctuations directly influence currencies:

  1. Growth Phase:

    • Increased demand for oil during periods of economic growth.
    • Strengthening currencies of oil-exporting nations.

  2. Decline Phase:

    • Reduced demand during periods of economic slowdown.
    • Weakening currencies of oil-exporting nations and strengthening of importing nations’ currencies.

  3. Crisis Phase:

    • Sharp price fluctuations due to geopolitical conflicts or economic crises.
    • Increased demand for "safe-haven" currencies like the USD and CHF.

How Traders Can Use Oil Data

  1. Track Oil Prices:
    Monitor oil price trends to predict movements in currency pairs linked to oil-exporting countries (e.g., USD/CAD, USD/RUB, USD/NOK).

  2. Follow Economic Reports:
    Pay attention to reports like U.S. crude oil inventory data or OPEC announcements, as they can impact oil prices and related currencies.

  3. Leverage Correlations:

    • Positive Correlation: Oil prices and currencies of oil-exporting nations (CAD, RUB, NOK).
    • Negative Correlation: Oil prices and the USD.

  4. Combine Fundamental and Technical Analysis:
    Use fundamental analysis to identify trends and technical analysis to find precise entry and exit points.

Strengths and Weaknesses of Oil Dependency

Strengths:

  • High predictability of currency movements based on oil price trends.
  • Opportunities for long-term planning for investors.

Weaknesses:

  • High volatility in the oil market can lead to sudden currency fluctuations.
  • Geopolitical factors and unexpected events can disrupt predictable patterns.

Conclusion: Why Understanding Oil’s Influence on Currencies Matters

Understanding the relationship between oil, currencies, and economies provides traders with valuable insights for making informed decisions. However, while oil is a significant factor, it is just one of many variables influencing the market.

 

At Ronin Academy, we emphasize the importance of a holistic approach: analyze oil trends, but also consider other fundamental and technical factors. Use this knowledge to build robust strategies and navigate the complexities of global markets effectively.