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.
Why Oil Is So Central to the Global Economy
Oil sits at the heart of modern civilisation.
It fuels:
● Transport (cars, aviation, shipping)
● Manufacturing and heavy industry
● Agriculture and food production
● Heating, electricity, and plastics
Because oil feeds into almost every layer of economic activity, changes in oil prices quickly affect:
● Inflation
● Consumer spending
● Business costs
● Government budgets
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:
● Inflation trends
● Economic growth
● Trade balances
● Interest rates
● Capital flows
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:
● Countries must buy USD to buy oil
● Rising oil prices increase global USD demand
● Falling oil prices can reduce USD liquidity flows
This creates a powerful but often misunderstood link between oil and major currency pairs.
During periods of high oil volatility, moves in:
● EUR/USD
● GBP/USD
● USD/JPY
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.
Oil-Exporting Countries (Generally Benefit from Rising Prices)
When oil prices rise, exporting nations often see:
● Higher export revenues
● Improved trade balances
● Stronger government finances
● Increased foreign investment
This tends to support their currencies.
Key oil-linked currencies include:
● Canadian Dollar (CAD)
● Norwegian Krone (NOK)
● Mexican Peso (MXN)
● Russian Ruble (RUB)
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:
● Push inflation higher
● Widen trade deficits
● Reduce consumer spending
● Pressure economic growth
Currencies commonly affected include:
● Japanese Yen (JPY)
● Indian Rupee (INR)
● Eurozone currencies
● UK pound (to a lesser extent)
Real-World Examples: When Global Tensions Caused Oil Price Spikes
Oil price spikes are rarely random. They are usually driven by fear of supply disruption, not actual shortages.
1. Middle East Conflicts
The Middle East controls a significant portion of global oil supply. Any escalation in the region sends shockwaves through energy markets.
Examples include:
● Tensions involving Iran and the Strait of Hormuz
● Conflicts in Iraq and Syria
● Attacks on Saudi oil infrastructure
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:
● Risk-off sentiment
● USD strength
● Volatility in oil-linked currencies like CAD and NOK
2. Russia–Ukraine Conflict
Russia is one of the world’s largest oil and energy exporters.
When the Russia–Ukraine conflict escalated:
● Sanctions restricted Russian energy exports
● Europe scrambled for alternative supplies
● Oil prices surged on supply fears
This had immediate forex consequences:
● Energy-importing currencies weakened
● Inflation spiked across Europe
● Central banks were forced into aggressive tightening cycles
Oil was a major transmission mechanism from geopolitics into forex markets.
3. OPEC and OPEC+ Political Tensions
Oil price spikes also occur when OPEC unity fractures.
Disagreements between major producers, such as Saudi Arabia and Russia, can:
● Reduce confidence in future supply
● Trigger speculative buying
● Create sharp, sudden price spikes
OPEC meetings are effectively macro events for forex traders, especially those trading USD/CAD or emerging-market currencies.
4. Attacks on Energy Infrastructure
Oil prices have spiked following:
● Drone attacks on Saudi facilities
● Pipeline sabotage
● Shipping disruptions
Markets react instantly. Oil prices rise first; currencies adjust second.
Why Oil Prices Collapse
Oil prices can also fall dramatically, sometimes faster than they rise.
1. Global Economic Slowdowns
When growth slows:
● Transport activity falls
● Manufacturing demand weakens
● Energy consumption drops
Oil prices often act as an early warning sign of economic trouble. Forex markets take note.
2. Oversupply and Price Wars
Oil producers don’t always coordinate well.
Oversupply can occur when:
● OPEC members cheat on quotas
● New producers flood the market
● Shale oil output rises rapidly
When supply overwhelms demand, oil prices don’t drift lower, they collapse.
What Happens When Oil Falls Below $60 per Barrel?
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:
● Many producers struggle to remain profitable
● Investment in new projects slows
● Supply growth begins to contract
Impact on Oil Production
When oil prices fall below $60:
1. High-Cost Producers Reduce Output
Producers with higher extraction costs, such as shale oil and offshore drilling, may:
● Scale back production
● Delay new projects
● Shut down marginal wells
This reduces future supply, often planting the seeds for the next oil price rebound.
2. Capital Investment Dries Up
Oil production is capital intensive.
Low prices mean:
● Fewer drilling projects
● Reduced exploration budgets
● Layoffs across the energy sector
This doesn’t affect supply immediately, but it creates supply constraints later.
3. Government Budgets Come Under Pressure
Many oil-exporting countries rely on oil revenue to fund public spending.
Below $60:
● Budget deficits widen
● Currencies weaken
● Political risk can increase
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:
● Weaker exchange rates
● Reduced foreign investment
● Increased volatility
Oil-Importing Currencies:
● Lower inflation
● Improved trade balances
● Potential currency support
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:
● Push inflation higher
● Pressure central banks to hike rates
● Can support currencies if growth holds
Falling Oil Prices:
Reduce inflation pressures
Allow dovish policy
Can weaken currencies tied to energy exports
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:
● Track WTI and Brent crude
● Watch oil during geopolitical escalations
● Monitor USD/CAD correlations
● Use oil as a macro confirmation tool
● Avoid trading oil-linked currencies blindly during oil shocks
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.”
