The US dollar has been falling steadily in recent weeks. It is particularly weak against the euro, having fallen almost 5% since January. OPEC countries buy much more from the eurozone than from the US, and the OPEC President has said they are ‘concerned’ about dollar weakness. We probably need to start monitoring oil prices in euros as well as dollars. Brent oil prices have risen from an average of $19.42/bbl in January 2002 to $71.05/bbl last month. In euros, however, they have only risen from €22/bbl to €52.96/bbl over the same period. That’s a rise of 266% in dollar terms, but only 141% in euro terms.
Over the past year, the difference is even more pronounced. Since June 2006, Brent has risen 3.6% in dollar terms, but actually fallen 2.3% in euros. Yet according to Deutsche Bank, OPEC buys over a quarter of its imports from the eurozone, and only half this amount from the US.
The British pound has been equally strong over the past year, reaching a 26 year high last week. So in total, almost a third of OPEC’s imports come from the euro/£ currency area. And taking this analysis one step further, Morgan Stanley have calculated that a 10% drop in the value of the US$ reduces Middle Eastern purchasing power by about 5%.
With interest rates in both the eurozone and the UK likely to rise further in coming months, OPEC will need quite a sizeable increase in the dollar price of oil if it is to see an increase in its own purchasing power. This might create a vicious circle, by helping to further weaken the dollar.
A mitigating factor for OPEC at the moment is that Asian currencies are still undervalued against the US $. But there is considerable political pressure from the US for this to change in advance of next year’s Presidential election. And the EU seems to be becoming increasingly concerned at the potential downside for its important export sales to Asia.
If this lobbying were to succeed, and the Japanese yen and Chinese yuan were to start rising, then the squeeze on OPEC’s income would intensify.