What Correlation Exists Between Oil and Currency?

What Correlation Exists Between Oil and Currency?

8 Min.

Oil and currencies are closely linked, as changes in oil prices can cause positive or negative reactions in countries that are heavily reliant on oil exports or imports. The petrodollar system involves the exchange of USD between countries that produce and buy crude oil. The decline in crude oil prices has negatively affected countries that heavily rely on oil exports, while the United States, which is a significant producer of energy, has benefitted from the decline. The U.S. shifted from being a net importer to a net exporter of energy in 2020, making it the largest global producer in 2021. Countries that have a more diversified economy are less likely to experience significant economic damage from fluctuations in oil prices.

Crude Oil's Subtle Link With Currencies

Currencies and crude oil share an intricate connection, with price movements in one sphere triggering corresponding or contrasting reactions in the other. This enduring correlation is underpinned by various factors such as resource allocation, trade balance, and market sentiment. Additionally, crude oil plays a substantial role in amplifying both inflationary and deflationary pressures, further accentuating these interconnections during pronounced upward and downward trends.

Dollar Denomination of Crude Oil

Crude oil is commonly denominated in U.S. dollars (USD), and both oil-importing and exporting countries transact in this currency. This practice traces its origins to the early 1970s, following the dismantling of the Bretton Woods gold standard. During this period, the petrodollar system emerged, contributing to the ascendancy of the U.S. dollar as the global reserve currency. The petrodollar system facilitates oil trade in USD.

Fluctuations in the dollar's value or in the oil price prompt immediate adjustments in exchange rates involving the dollar and multiple forex pairs. These adjustments exhibit a weaker correlation in nations with limited crude oil reserves, such as Japan, while being more pronounced in countries possessing substantial reserves, including Canada, Russia, and Brazil.

Oil-Linked Economies in Flux

In the era spanning from the mid-1990s to the mid-2000s, numerous nations capitalized on their crude oil stores, amassing debt for diverse purposes, from infrastructure development to military expansion and social programs.

Following the 2008 global financial crisis, countries faced a choice: some opted for deleveraging, while others doubled down on borrowing against their reserves to rebuild trust in their fragile economies. This elevated debt burden sustained robust growth until the precipitous drop in global oil prices in 2014, pushing oil-dependent nations like Canada, Russia, and Brazil to navigate turbulent waters as their currencies, namely the Canadian dollar (CAD), Russian ruble (RUB), and Brazilian real (BRL), plummeted.

Selling pressures cascaded into other commodity categories, sparking concerns of global deflation. This deepened the correlation between affected commodities, including crude oil, and economic hubs lacking substantial commodity reserves, such as the Eurozone. Currencies in nations rich in mining resources but lacking energy reserves, exemplified by the Australian dollar (AUD), also faced a sharp decline in tandem with the currencies of oil-endowed countries.

Eurozone's Economic Challenges

In late 2014, declining crude oil prices triggered deflation concerns within the Eurozone as local consumer price indices slipped into negative territory. Early in 2015, mounting pressure prompted the European Central Bank (ECB) to implement an extensive monetary stimulus initiative to counter deflation and reintroduce inflation into the economic landscape.

The European version of quantitative easing (QE) commenced with the first round of bond purchases in March 2015 and continued until mid-2018. While the European Union witnessed growth in 2019 and the early months of 2020, the onset of the COVID-19 pandemic led to a recession. By 2022, surging energy prices contributed to reduced household consumption, further impeding the recovery effort.

Compounding these challenges, Russia's invasion of Ukraine resulted in a spike in oil prices, casting shadows on Europe's energy security. Sanctions imposed on Russia highlighted the uncomfortable geopolitical predicament faced by several Eurozone nations reliant on Russian oil and gas.

Eurozone's Economic Challenges

In late 2014, plummeting crude oil prices triggered deflation concerns within the Eurozone as local consumer price indices dipped into negative territory. This led to mounting pressure on the European Central Bank (ECB) in early 2015 to initiate an expansive monetary stimulus program aimed at halting the deflationary trend and reintroducing inflation into the economic system. The European version of quantitative easing (QE) saw its inception with the first round of bond purchases in March 2015 and persisted until mid-2018.

While the European Union enjoyed growth in 2019 and the early part of 2020, the emergence of the COVID-19 pandemic induced a recession. By 2022, the upsurge in energy prices contributed to a decline in household consumption, impacting an economy striving to recover.

This challenge was exacerbated by Russia's invasion of Ukraine, causing oil prices to surge and raising concerns about Europe's energy security. The imposition of sanctions against Russia revealed an uncomfortable geopolitical situation for several Eurozone nations reliant on Russian oil and gas.

EUR/USD and Crude Oil Dynamics

The EUR/USD, renowned as the world's most prominent and liquid currency market, captivates the attention of numerous forex participants. In March 2014, this currency pair reached its zenith, a mere three months before crude oil commenced a modest descent, which gathered momentum in the fourth quarter, coinciding with crude's decline from the upper 80s to the low 50s.

Euro selling pressure persisted into March 2015, coinciding with the commencement of the European Central Bank's monetary stimulus program. Subsequently, the Euro continued its descent through 2022, reaching as low as $1.05 per euro. Simultaneously, crude oil prices maintained around $100 by the second quarter of 2022.

Impact of the U.S. Dollar

Historically a petroleum net importer, the United States underwent a transformation in 2020, as crude oil production surged, leading to a daily export volume of 8.51 million barrels. This trend continued into 2021, with exports reaching 8.63 million barrels per day. Consequently, the U.S. claimed the position of the world's second-largest energy producer, following China, and leveraged this ascendancy to impose sanctions on Russia while boosting exports to European nations in 2022.

The surge in U.S. petroleum production had a notable effect on the U.S. dollar for several reasons. Firstly, following the bear market, U.S. economic growth outperformed that of its trading partners, safeguarding its financial stability. Secondly, the remarkable economic diversity of the United States mitigated its dependence on the energy sector.

Since the Russian invasion of Ukraine in 2022, the U.S. dollar has appreciated against many global currencies, driven by the safe-haven appeal and escalating inflation, even as oil prices soared.

Impact of Overreliance on Crude Oil

Countries excessively dependent on crude oil exports have suffered more pronounced economic consequences when compared to those with diversified resources. A case in point is Russia, where energy constituted over 65% of exports in 2014, though this proportion diminished to slightly over 40% in 2021. Following the imposition of severe sanctions due to Russia's Ukraine incursion in 2022, this figure dropped even more dramatically.

In 2015, Russia experienced a severe recession, with a 4.6% year-over-year (YOY) decline in GDP for the second quarter, intensified by Western sanctions linked to its first incursion into Crimea. The trend continued with a 2.6% YOY drop in GDP for the third quarter of 2015, followed by a 2.7% contraction in the fourth quarter.

Subsequently, a recovery in crude oil prices led to a substantial upturn in Russian GDP. GDP growth turned positive in the fourth quarter of 2016 and has remained so since. However, in 2022, economists anticipate a significant economic contraction in Russia, as the Ruble weakened, and inflation surged following a larger Ukraine invasion.

The top crude oil producers in 2023, based on daily barrels, are:

  • United States: 20.2 million
  • Saudi Arabia: 12.1 million
  • Russia: 10.9 million
  • Canada: 5.7 million
  • China: 5.12 million
  • Iraq: 4.55 million

It is worth noting that economic diversity wields a more substantial influence on underlying currencies than absolute export volumes. Colombia, for instance, ranked 19th in crude oil production but saw crude oil accounting for 25% of total exports, leading to a notable devaluation of the Colombian peso (COP) in 2014.

The Ruble's Decline and USD/NOK Impact

In early 2015, several Western forex platforms ceased ruble trading due to liquidity concerns and capital controls, prompting traders to employ the Norwegian krone (NOK) as a substitute market. During this period, USD/NOK displayed a notable consolidation pattern from 2010 to 2014, aligning with crude oil's fluctuations between $75 and $115.16.

The second quarter of 2014 witnessed a dip in crude oil prices, coinciding with a robust upswing in USD/NOK that gained momentum in the fourth quarter, ultimately driving the currency pair to a new decade high. This signified continued economic strain on Russia, even as crude oil began to recover from its lows. Despite the challenges of high volatility, short-term traders found profitable opportunities in this strongly trending market. From 2020 onward, USD/NOK exhibited volatility within an overall horizontal trajectory.

In 2022, the Ruble experienced a significant devaluation due to economic sanctions imposed following Russia's Ukraine invasion. To counteract this, Russia's central bank intervened to support the Ruble, while President Putin advocated for oil exports to be transacted in Rubles. This surge in demand for the Russian currency bolstered its strength throughout the latter part of 2022.


Crude oil shares a robust correlation with numerous currency pairs, a synergy primarily driven by three factors. Firstly, its quotation in U.S. dollars results in immediate repercussions on related forex crosses when oil prices fluctuate. Secondly, the heavy reliance of national economies on crude oil exports tethers them to the ebbs and flows of energy market trends. Lastly, the decline of crude oil prices catalyzes corresponding downturns in industrial commodities, heightening the specter of global deflation and necessitating repricing of currency pair relationships.

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