World oil price is one of a handful of economic indicator that is indirectly influencing every country's economic condition. It is further reflected in the financial market.

Oil as one of the world's main energy sources holds huge influence on almost every country. Therefore, world oil price is one of a handful of economic indicator that is indirectly influencing every country's economic condition. It is further reflected in the financial market as the country's currency is appreciated or depreciated following oil prices ups-and-downs. However, the correlation is highly dependent on the condition of world oil market and it could change accordingly.

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Before US Shale Fracking

The way world oil price affects forex could be seen through two point of views: as oil-producing country and as oil-consumer. An oil producing country will benefit from higher oil price, hence its currency might strengthen on higher oil price. Contrarily, a manufacturing-based country that needs a lot of energy but unable to produce it by themselves will have to pay more in such situation; thus their currency will suffer during oil price boom. These correlations more often than not, happen in longer time period instead of on day-to-day basis as cumulative influence hit slowly.

Two famous examples are Canadian Dollar and American Dollar. Canada is a net oil exporter, which means it will gain more as oil prices soar. Unsurprisingly, Canadian dollar tended to go up along with oil prices. On the other hand, the US needed to import oil in order to fulfill around half of its industrial and household energy needs, in which a portion of it is catered by Canada. Consequently, CAD/USD tended to move in the same direction as oil price.

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Another example is Japanese Yen. Japan is an energy-poor country, and largely depended on its own nuclear generator and imported oil and gas. Therefore, high oil price could be expected to hit hard on its economy. In line with it, CAD/JPY often make significant move around the same time as oil price. When oil prices fell, we could expect CAD/JPY to go down; and while the opposite happen, we could wish for the loonies to go bullish against Japanese Yen.

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However, above explanations might have changed now that the US shale fracking boom gradually changes world oil market landscape.

 

US Shale Fracking

Hydraulic Fracturing, also known by its shorter nickname Fracking is a method to drill well by injecting high pressure fluids in order to create fractures in deep-rocks formation where gas and petroleum could flow through much more easily. Such method has been in practice for a long time. In the US particularly, it has been done since 1949.

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The use of fracking to drill shale  itself has begun in the US on 1976 when US government started the Eastern Gas Shales Project. However, the industry has grown so much lately that reportedly it grew 45% each year during 2005-2010. Shale fracking is responsible in boosting US energy output. Consequently, US gas imports decreased. US defeated Russia by becoming the world's number one gas producer, and is expected to be a net gas exporter around 2020. At the same time, shale oil has pushed down US oil imports and placed it in the world third largest oil producer after Saudi Arabia. A projection by International Energy Agency even predict that US oil shale will continue to grow and put the country to be world's largest oil producer in 2020.

Fracking enable exploration on deeper earth and pump out oil and gas in a way that other method can not. But it is not without disadvantages. Opposition on fracking often quote how the method is environmentally dangerous. It could contaminates ground water, pollutes the air, leaks gas and dangerous chemicals into the surface, and so on. Up to 600 chemicals are used in fracking fluid, and some of them are known as carcinogens and toxic, including Uranium, Mercury, Ethylene Glycol, Methanol, Hydrochloric Acid, and Formaldehyde. This is especially alarming because many companies doing fracking refused to declare what kind of chemical substance is contained in the fluids they use.

Moreover, such rock drilling potentially lead to seismic events. In fact, it is allegedly to be the cause behind more than a dozen of small earthquakes in Texas during 2008-2009. This is why fracking continue to be a subject of debate in which many countries refrained from using it or place strict restrictions around its application.

Nonetheless, massive US oil and gas shale fracking is changing world oil market landscape. According to data from the US Energy Information Administration, oil production from countries outside the Organization of the Petroleum Exporting Countries (OPEC) has grown from year to year and now represents around 60% of world oil production (2014). It means that the power that was possessed by the twelve states' cartel OPEC to determine world oil prices has dropped significantly, as well as their respective countries bargaining power in the world politics and economy.

 

Post US Shale Fracking

Further changes is revealed in a new report by Jeffrey Currie from Goldman Sachs that was reviewed by Business Insider.

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Currie denoted that the US imported approximately 12 million barrels a day of oil in 2008; but the figure has skydived, and today US oil imports is less than 5 million barrels a day due to the US shale technology. Around 2.6 millions of it is imported from Canada and Mexico. That means, US oil imports has fallen more than 60% since 2008, and this significantly decreased the commodities correlation with the US Dollar.

Currie mentioned that, Along with the post-crisis financial market normalization, (the drop in oil imports) has dramatically reduced the correlation between oil and the USD, to around 0% (i.e. uncorrelated) today from historical highs near 60% in 2008/2009.

On the other hand, oil prices is still seen as one of the Canadian dollar movers till this day. The reason undoubtedly is because oil production and refinery is accounted as one of Canada major industry. Canada is the sixth largest world oil producer after Saudi Arabia, United States, Russia, and China. The country holds 4.54% of the world oil market share.

 

Conclusion

The US is now employing hydraulic fracturing to mine its shale basins that is estimated to contain huge amount of oil and gas reserves. Even more, US shale oil production is expected to grow further in the future. The circumstances lead us to two conclusions:

  1. Oil exporter countries is in disadvantage when oil prices go down; thus their currencies is depressed in the forex market. The depreciation will go on until oil prices rebounded, or until the country find another means to fulfill the gaps left by its oil production industry.

  2. Correlation between oil prices and currencies is diminishing over time for oil importer countries currencies' as their oil imports reduced. In case of the USD, the correlation diminished because of US oil shale fracking.

  3. There are many guesses over what caused the recent drop of world oil prices; but US Dollar appreciation is not its main reason.