The Effects Of OPEC On The Forex Market
What is OPEC?
The Organization of the Petroleum Exporting Countries is an intergovernmental organization represented by 13 countries in the world. Founded on the 14th of September 1960 in Bagdad, as a way to unify and co-ordinate petroleum policies to secure fair and stable prices for producer and consumer. The organization’s purpose is to provide an efficient, affordable, and regular supply of petroleum. By extension, this ensures a fair return on capital for those invested in the industry.
Why is OPEC important to Forex traders?
Let us look at what OPEC means to Forex traders as an economic event, and how it stands out from other major events. Each month we are told how many barrels of crude oil have been produced and sold in the mainland and whether the price is increasing or decreasing, predicated upon the supply and demand for the product from non-OPEC producers.
When OPEC adjusts the supply and demand of oil it influences the price of oil for oil traders, however, it also influences the currencies such as the Canadian dollar because Canada is a large consumer and holds a big percentage of the reserves of oil in the USA.
OPEC’s ability to reduce oil price volatility, to make the production of oil more profitable for OPEC members, helps traders because us market participants live off of the volatility. As traders, we need to be aware of the fundamentals and the impact they play on the technical side of our analysis. So understanding that the price of oil impacts some currencies more than others may help us take advantage of that.
If you are a trader who trades the Canadian Dollar then it is important to watch out for OPEC news events because these have a huge influence on CAD pairs. Another important currency to watch usually during the OPEC Meeting is the US Dollar because crude oil is quoted in US Dollars. Looking at the charts you will see that as the dollar drops in price, the price of oil increases. Meaning they are inversely proportional.
Understanding how it works
The countries that buy crude oil and those that produce it exchange in USD through a system called the petrodollar system. This system elevated the US dollar to the world’s reserve currency. The USA and Saudi Arabia made this deal to standardize oil prices in dollar terms, allowing for petrodollar recycling (how a country’s revenues from petroleum exports are invested or spent). This helps grow economies and pulls the value of the dollar up.
How do we take advantage?
The easiest way to take advantage is to understand the way the OPEC meetings have worked over the years, by looking back at the meeting minutes on an economic calendar and observing how it moved monthly. Another profitable way would be to follow the news stories, by the big agencies such as Bloomberg and CNBC, about the top 5 producers of oil.
As traders, we should also understand that taking advantage, sometimes means staying away. Staying away from the currencies for that day can save your account or even an unnecessary loss in the Forex markets.
In conclusion, the effects of OPEC may be on a few currencies, but it is still a major event to be aware of if you trade the pairs affected.
Happy Trading Traders!