USD/NOK surges after crude oil drops below zero in a historic meltdown
- The USD/NOK pair rose in overnight trading as the price of crude oil dropped to a historic low.
- The weakness of the Norwegian krone came a week after OPEC members and Russia agreed to production cuts.
- Trump is now considering blocking Saudi Arabia imports in a bid to stabilize prices.
The USD/NOK pair rose by more than 30 basis points as traders reacted to the plunging oil prices. The krone also dropped against its close peers like the euro, Swiss franc, and sterling.
Norwegian krone drops as oil price drop
Norway is the second-biggest oil producer in Europe after Russia. The country exports more than 1.5 million barrels of oil every day mostly to countries in Europe. The industry employs more than 225,000 people, directly and indirectly, making it an important component of the country’s economy.
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Therefore, the current weakness in oil prices has had significant impacts on the Norwegian economy. The Norwegian krone has dropped by more than 20% against the dollar this year. It has weakened by about 11% against the British pound and more than 14% against the euro. This is mostly because low oil prices mean that the country is getting less amount of foreign exchange.
Yesterday, oil prices declined as the market grew concerned about demand. In the United States, the price of May contracts moved to below zero for the first time on record. The price fell to a low of -$40 per barrel. Essentially, this means that oil producers will now pay people to buy their oil. This makes sense to a number of producers because shutting down their wells or finding a place to store would be more expensive.
The current glut in oil prices comes a week after OPEC, Russia and G20 announced plans to cut oil productionby almost ten million barrels. While this was a welcome move, it did not do anything to boost demand. Since most people are staying at home, gas stations are not selling oil to anyone. Most aeroplanes are not flying, and most manufacturers are not producing.
Still, in the long run, the lower oil prices could naturally help stabilize oil prices because most oil producers will go out of business. In a statement to CNN, Artem Abramov said:
“$30 is already quite bad, but once you get to $20 or even $10, it’s a complete nightmare. At $10, almost every US E&P company that has debt will have to file Chapter 11 or consider strategic opportunities.”
In a statement, Donald Trump said he was considering halting oil imports from Saudi Arabia to boost prices. This could be too late.
Norway reopening hits a barrier
The Norwegian economy has been affected significantly by the current coronavirus pandemic. Analysts say that the month-long shutdown and low oil prices will lead to the first recession since 2008. They also expect many companies to file for bankruptcy and the unemployment rate to rise.
Early this month, data from the country showed that the unemployment rate had jumped to more than 14%, which is the worst number ever released in decades.
The Norwegian government has announced measures to support the economy. Early this month, the government announced a stimulus package worth more than $25.7 billion to help mitigate the situation. The funds will be given to companies and individuals. The government has also changed laws to make it easier for companies to get loans. Also, it has changed lay-off regulations to shift some costs from companies to the government.
Meanwhile, the Norwegian central bank too has implemented a number of changes. It is among the central banks participating in dollar swaps with the Federal Reserve. It has also brought interest rates to record lows and boosted liquidity in the market.
USD/NOK technical outlook
On the four-hour chart, the USD/NOK has been trading sideways since late March. The pair has traded within a range of 10.6020 and 10.1200. The current price of 10.4660 is between 50% and 38.2% Fibonacci retracement level. Also, the price is slightly above the 50-day and 100-day exponential moving average. Therefore, the price could retest the upper side of the channel at 10.6020, which is slightly below the 50% retracement level.