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Financial Analyst/ Guest author, RADEX MARKETS
Lee W. is a seasoned professional trader with over 10 years of experience. Passionate about sharing valuable expertise and unique market insights, Lee W. now serves as an external and independent market analyst for RADEX MARKETS.
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One of the best quotes I recently heard about oil is by the legendary Tommy Norris (Google his name if you are not quite on the same page), it goes like this…….
OIL.
“Good and bad don't factor into this. Our great-grandparents built a world that runs on this stuff, right here. Until it starts running on something else, we got to feed it, or the world stops. There is an alternative. You can throw your phone away and trade that Mercedes in for a bicycle or a horse and start hunting your own food and living in a tent, but you'll be the only one and it won't make a damn bit of difference. Plus, I hear the moral high ground gets really windy at night.”
If you trade forex and don’t pay attention to oil prices, you’re effectively ignoring one of the most powerful macroeconomic forces on the planet. Oil is not just another commodity ticking away on a chart, it is a foundational input for global growth, inflation, trade balances, and monetary policy.
Currencies respond to economic pressure. Oil creates that pressure.
When oil prices spike, inflation rises, costs surge, and central banks start paying attention. When oil prices collapse, entire economies wobble, currencies weaken, and producers start switching off supply. Forex traders who understand this relationship don’t just see price movement, they understand why it’s happening.
In this article, we’ll explore why oil prices matter in forex trading, examine real-world examples of oil price spikes driven by global tensions, and explain what happens to oil production, and currencies, when prices fall below $60 per barrel.
Oil sits at the heart of modern civilisation.
It fuels:
Because oil feeds into almost every layer of economic activity, changes in oil prices quickly affect:
Forex markets are forward-looking. They price what the economy will look like, not what it looks like today. Oil prices provide one of the clearest early signals of those future conditions.
The Direct Link Between Oil and Forex Markets
Forex traders focus on:
Oil affects every single one of these.
When oil prices rise, inflation usually follows. When inflation rises, central banks are pressured to tighten monetary policy. When policy tightens, currencies move.
Oil doesn’t just influence forex indirectly; it sits right at the core of macro currency pricing.
Oil Is Priced in US Dollars – A Critical Forex Mechanism
One of the most important oil–forex relationships is with the US dollar.
Oil is traded globally in USD, which means:
This creates a powerful but often misunderstood link between oil and major currency pairs.
During periods of high oil volatility, moves in:
often accelerate as global capital adjusts to changing energy costs.
Oil-Exporting vs Oil-Importing Currencies
Oil price changes do not affect all currencies equally.
When oil prices rise, exporting nations often see:
This tends to support their currencies.
Key oil-linked currencies include:
Canada is the classic example. Oil exports form a significant part of the Canadian economy. When oil prices rise, USD/CAD often falls as CAD strengthens.
Oil-Importing Countries (Often Hurt by Rising Prices)
Countries that rely heavily on imported energy face rising costs when oil prices increase.
This can:
Currencies commonly affected include:
Oil price spikes are rarely random. They are usually driven by fear of supply disruption, not actual shortages.
The Middle East controls a significant portion of global oil supply. Any escalation in the region sends shockwaves through energy markets.
Examples include:
Even the threat of disruption to the Strait of Hormuz, through which around 20% of the world’s oil passes, is enough to send oil prices sharply higher.
For forex traders, these moments often create:
Russia is one of the world’s largest oil and energy exporters.
When the Russia–Ukraine conflict escalated:
This had immediate forex consequences:
Oil was a major transmission mechanism from geopolitics into forex markets.
Oil price spikes also occur when OPEC unity fractures.
Disagreements between major producers, such as Saudi Arabia and Russia, can:
OPEC meetings are effectively macro events for forex traders, especially those trading USD/CAD or emerging-market currencies.
Oil prices have spiked following:
Markets react instantly. Oil prices rise first; currencies adjust second.
Oil prices can also fall dramatically, sometimes faster than they rise.
When growth slows:
Oil prices often act as an early warning sign of economic trouble. Forex markets take note.
Oil producers don’t always coordinate well.
Oversupply can occur when:
When supply overwhelms demand, oil prices don’t drift lower, they collapse.
This is a critical level for both oil markets and forex traders.
The $60 Threshold Matters
While exact break-even levels vary, $60 per barrel is widely seen as a psychological and economic tipping point.
Below this level:
Impact on Oil Production
When oil prices fall below $60:
Producers with higher extraction costs, such as shale oil and offshore drilling, may:
This reduces future supply, often planting the seeds for the next oil price rebound.
Oil production is capital intensive.
Low prices mean:
This doesn’t affect supply immediately, but it creates supply constraints later.
Many oil-exporting countries rely on oil revenue to fund public spending.
Below $60:
This is why prolonged low oil prices often coincide with weakness in CAD, NOK, and emerging-market currencies.
Forex Implications of Sub-$60 Oil
For forex traders, low oil prices usually mean:
Oil-Exporting Currencies:
Oil-Importing Currencies:
However, if oil falls due to a global slowdown, risk-off sentiment can overwhelm these benefits.
Context always matters.
Oil, Inflation, and Central Banks
Oil prices feed directly into inflation.
Rising Oil Prices:
Falling Oil Prices:
Central banks watch oil closely, and so should forex traders.
How Forex Traders Can Use Oil in Practice
You don’t need to trade oil directly.
Smart forex traders:
Oil provides context, it explains why currencies are moving.
Final Thoughts: Oil Is a Macro Driver You Cannot Ignore
Oil prices influence inflation, growth, trade balances, and central bank decisions, the foundations of forex pricing.
Understanding oil won’t make you perfect but ignoring it will eventually make you wrong.
Because when oil moves aggressively, forex markets rarely stay quiet for long.
And a final word from our friend Tommy Norris:
“We have a 120-year petroleum-based infrastructure. Our whole lives depend on it.
And, hell, it's in everything. The roads we drive on The wheels on every car ever made, including yours. It's in tennis rackets and lipstick and refrigerators and antihistamines. Pretty much anything plastic. Your cell phone case, artificial heart valves. Any kind of clothing that's not made with animal or plant fibres. Soap, even hand lotion, garbage bags, fishing boats. You name it. Everything. And you know what the kicker is? We're gonna run out of it before we find its replacement.”
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