Not just China, the whole world is getting into an energy crisis now. Along with coal, natural gas and crude oil are also facing some unprecedented hikes in prices. Recently, the price rose to $80 for a barrel of crude oil. This price is the highest in the last three years.
The data depicts the hike in price in Europe. Whereas, it is a matter of concern for all the countries. The whole world may fall into an energy crisis as the winter months approach.
One of the major causes behind this is the pact signed by the countries to reduce the consumption of fossil fuels. The after-effects are quite visible from the crisis China is facing these days. The power crunch is the result of China’s contribution to the emission of greenhouse gases. China promised to lower its level of coal usage and thus now the focus has shifted to the other source of power generation. Crude oil is alternative China is trying to get back with.
The scenario of the global market is beneficial for the oil-producing countries and getting troublesome for the importers of crude oil.
If we consider the uprising of the issue, one major reason behind this instant hike in crude oil is the decremented supply during the pandemic. As COVID 19 hit the world, the energy utilization was lowered as almost all the world was partially or fully locked down. The demand for the oil dropped and due to the decisions taken by the authorities, the supply also dropped. As the countries are trying to get back to normal and restoring their economy, a sudden spike is seen in demand. This abrupt demand was not followed by increased supply until last week when two inventories in the US started their functioning again.
Many of the production areas were hampered due to the hurricanes in the Gulf of Mexico. The hurricanes Ida and Nicholas are the ones mainly responsible for that. Now, that the situations seem better, the prices have dropped back to $78 per barrel. Whereas, the prices are expected to reach near $90 per barrel by the end of the year. The countries have been notified to monitor and rectify the over-usage and look for some more renewable sources of energy as well. In the coming years, as the economies are going to bounce back to normal from the effects of the pandemic, inflation is definitely on the cards.
Coming to the effects of oil prices on the forex trade, US dollars are used all across the globe to make payments. There is a very strong link between the US dollar and the Canadian dollar. As the countries are strongly linked with the import-export of crude oil, the oil crisis will influence the exchange rate as well.
The country’s inflow of currency is going to increase due to its exports all across the globe. Due to elevated demand, one can predict that the value of the Canadian dollar is going to rise high in the coming days.
Since the supply is not sufficient to cater to the demands and the export duties are high, it is likely the importers will be looking for more options eventually. If a renewable source of energy is adopted for the purpose, crude oil may lose its importance and demand and that will ultimately affect the huge export business of Canada. So, crude oil reserves are responsible for determining the value of the Canadian dollar and eventually, the status of the Canadian economy.
Monitoring all these circumstances, it is likely that the USD/CAD pair is going to experience a hike. The increased interest rates by the fed, the Evergrande crisis, and the energy crisis all stand in favor of increasing the value of the US dollar. Although, in the case of the crude oil price hike, the Canadian dollar is going to benefit more than the US dollar.