Microeconomic Indicator in FOREX:
Crude Oil Production
What is Crude Oil Production?
Crude Oil Production can be described as the amount of raw oil extracted from the ground and sea after the removal of impurities and unwanted particles. It also includes crude oil, natural gas liquids (NGL’s) and additives. This indicator is expressed in thousands of ton of oil equivalent (toe). Crude oil is mineral oil which constitutes of natural origin hydrocarbons, yellow to black in colour, which has variable density and viscosity. NGL’s are liquefied hydrocarbons produced by manufacturing purification and stabilisation of natural gas, to improve the combustion characteristics of this crude oil, additives are added. These additives are non-hydrocarbons blended with other substances to modify their properties. The output of secondary oil products is referred to as refinery production, from an oil refinery after treatment.
Crude oil is the base for a lot of products, including petroleum. When mixed with other chemicals, this crude oil acts as a base for over 6000 items. Petroleum byproducts are used to make tar, asphalt, paraffin wax, and lubricating oils. It is used as an element in fertilizers, perfume insecticides, soap, and vitamin capsules.
There are three types of Crude oil, and they are distinguished by the quality and the place they are found. The first one is West Texas Intermediate crude oil, which is of the highest quality because it is lightweight and low sulfur content. The second one is the Brent Blend Oil, which is a combination of crude oil from 15 separate oil fields in the North Sea. This crude oil is excellent for making gasoline. The third one is Shale crude oil, and it is extracted from layers of shale rock.
What does the Crude Oil Production of a country measure?
From a theoretical point of view, a crude oil production rate may be reflected on the economy and exchange rate through two main channels:
In terms of trade– If there is a fall in oil prices from oil exporter, it drives down the cost of non-traded goods in the domestic economy and thereby affecting the exchange rate. The exchange rate is measured by crude oil, which is defined as a relative price of traded goods vs. non-traded goods between the domestic and foreign economies.
Financial effect– If there is excess oil production, this will shift the wealth from oil exporters to oil importers, leading to a significant change in the current account balances and portfolio reallocation. In order to restore the financial sustainability of oil exporters, the exchange rate has to appreciate.
These are some fundamental concepts that oil prices measure, but its impact may be partially different in practice.
Reliable sources of information on ‘Crude Oil Production’ for Major currencies
The organization of the Petroleum Exporting Countries (OPEC) is a group consisting of 14 of the world’s major oil-exporting nations. It is the OPEC that coordinates petroleum policies and is responsible for managing the supply of oil in an effort to set the oil price on the world market. They do this to conduct free trade of oil that might affect economies of both producing and purchasing countries. U.S. Energy Information Administration is a body that provides independent statistics and analysis in the area of crude oil production. Here is a list of crude oil production data by some of the major economies in the world:
GBP(Sterling) – https://tradingeconomics.com/united-kingdom/crude-oil-production
What do traders care about the Crude Oil Production and its impact on the currency?
Low production of Crude Oil will make oil prices higher, which increases the prices of other fuels, such as gasoline, house cooking oil, and natural gas. This drives the cost of electric power generation and manufacturing. According to EIA, 96% of transportation is dependent on oil prices alone. That leads to higher food prices. It also impacts 43% of industrial products 21% of residential and commercial use, and 3% of electric power generation. As a result, high oil prices increase the cost of almost every product we buy, creating inflation. We know that inflation will have a significant adverse effect on the currency and foreign exchange rate.
The fundamental factors of demand and supply continue to dominate where both an increase in demand and fear of supply disruptions have exerted upward pressure on oil prices. Global demand for oil has been increasing, which is a lot higher than gains in oil production and available capacity. An ample reason is that developing nations, like China and India, have been growing rapidly. Countries like these have become more industrialized and urbanized, which has contributed to an increased demand for oil. In recent turmoil, the oil-producing countries such as Nigeria, Venezuela, Iraq, and Iran have prompted fears of supply disruptions. As an implication of higher oil prices, both macroeconomic and microeconomic indicator numbers are showing its effect.
Therefore, how monetary policymakers treat the economic fluctuations caused by lower oil production may also play a significant role in the impact of the shocks on economic growth and inflation rate. Household and investment firms sense that the Fed is not going to pay much attention to inflation because they probably feel that oil shocks would have a drastic impact on the economy and other commodities.
Frequency of the release
The EIA Weekly Petroleum Status Report is a comprehensive report on supply, demand, and production in the United States. Released every Wednesday at 10:30 AM Eastern time also gives figures on gasoline inventories as well as refinery utilization. OPEC Monthly Oil Market Report is also critical as it brings the cuts in oil production if needed.
The Bottom Line
Observation and analysis have shown that nations that are more dependent on crude oil exports due to high production capacity have incurred more significant economic damage than those with more diverse resources.
Economic diversity tends to impact the underlying currency more than absolute export numbers. Crude Oil Production as an economic indicator has no CEO scandals, no bad earnings, and no failed product launches. The only dynamic that matters is how much crude oil is available for sale and how many entities want to buy it.