Crude oil prices are on track to end February lower, for their fourth monthly loss in a row.
The Federal Reserve’s aggressive interest-rate hikes are weighing on crude benchmarks.
But many analysts expect prices to rise again in March as Russia slashes its oil output.
Oil prices are on track to post a monthly loss for the fourth time in a row, as traders stay firmly focused on the prospect the Federal Reserve will keep hiking interest rates.
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That potential hit to demand appears to be overshadowing the chances of a jump in appetite for crude as China’s economy reopens or as Russia slashes supply. A buildup in US stockpiles is also likely weighing on prices.
Brent crude futures, the global benchmark, have fallen 2.2% to $83 a barrel in February so far, while West Texas Intermediate crude futures have dropped 3.2% to $77 a barrel. The declines put the benchmarks on track to fall for a fourth consecutive month.
“Crude oil prices have remained volatile this year, with markets torn between fears of an extended Federal Reserve rate-hiking cycle due to a tight US labor market and optimism over a recovery in oil demand as China’s economy reopens,” UBS CIO Mark Haefele said in a research note.
In February, investors returned to bracing for US interest rates to be higher for longer, after a string of positive economic data including a surge in job numbers. That offers the Fed the scope to raise borrowing costs above 5% and then hold them there, as it tries to rein in sticky high inflation.
Russia and Iran plan a gold-backed stablecoin, while Brazil and Argentina seek a shared currency. Here are 5 rising threats to the dollar’s dominance of global trade.
The dollar’s supremacy in global trade faces fresh challenges as several countries float plans to use local currencies in commerce.
Russia and Iran are working to create a gold-backed stablecoin, while China is increasingly using the yuan in its oil trades.
Here are 5 rising challenges to the greenback’s dominance of international trade and investment flows.
The dollar’s dominance of global trade and investment flows is facing a slew of new threats as many countries push plans to boost the use of alternative currencies.
Nations from China and Russia to India and Brazil are pushing for settling more trade in non-dollar units – with plans ranging from the use of local currencies to a gold-backed stablecoin and a new BRICS reserve currency.
For decades, the greenback has reigned supreme as the world’s reserve currency and is widely used in crossborder trade, especially for commodities such as oil. Thanks to its relative price stability, investors see it as a safe-haven asset in times of heightened economic and geopolitical uncertainty.
The dollar was further bolstered last year by a surge in US interest rates that made it attractive to foreign investors seeking higher yields. It surged 17% during the first nine months of 2022, but has since lost some of its shine on the prospect that the Federal Reserve may soon end its rate hikes as inflation cools rapidly.
Against this backdrop come the latest threats to the greenback’s reign — here are five currency projects from across the world that are ultimately aimed at undermining the dollar’s supremacy.
Brazil and Argentina plan a common currency
Brazil and Argentina recently announced they are gearing up to launch a joint currency, named the “sur” (south), that could eventually become a euro-like project embraced by all of South America.
A common currency could help boost South American trade, the countries’ leaders said in a joint statement, because it evades conversion costs and exchange rate uncertainty. That could erode the dollar’s dominance in the region, given the greenback accounted for as much as 96% of the trade between North and South Americas from 1999 to 2019, according to the Federal Reserve.
Russia and Iran eye a gold-backed stablecoin
Russia and Iran are working together on a cryptocurrency backed by gold — a ‘stablecoin’ that could replace the dollar for payments in international trade.
The two countries, both of which have been hit by Western sanctions, want to issue a “token of the Persian region” for use in crossborder transactions, with a plan to launch it in a special economic enclave in Astrakhan in southern Russia, which already handles Iranian shipments.
But the project can move forward only once Russia’s market for digital assets is fully regulated, according to a Moscow lawmaker.
Russia and Iran have stepped up their push to “de-dollarize” in recent months, according to think tank the Jamestown Foundation. They aim to increase their volume of trade to $10 billion per year via moves such as developing an alternative international payments system to SWIFT, which they are banned from.
UAE, India look at using rupees in non-oil trade
Meanwhile, the United Arab Emirates and India have floated the idea of conducting non-oil trade in rupees.
The move would build on a free trade agreement signed last year, which aims to boost trade excluding oil between the two countries to $100 billion by 2027.
China has also pondered on the idea of settling non-oil trade in local currencies that exclude the greenback, according to minister of state for foreign trade of the UAE Thani bin Ahmed Al Zeyoudi.
China pushes for the yuan to replace the dollar in oil trades
The move looks to chip away at the petrodollar regime in place since the 1970s, where global oil transactions are largely settled in dollars.
Toward the end of last year, Beijing began buying Moscow’s crude at steep discounts, completing those purchases in yuan rather than dollars, giving rise to the so-called petroyuan.
With a stronger greenback, oil contracts become more expensive because the deals are largely priced in the US currency, and this also explains China’s shift away from the dollar.
Kpler analyst Viktor Katona said Russia has effectively become “an Asian nation that in my opinion has introduced the yuan into large-scale oil trade.”
Russia, China propose a new reserve currency
Last year, Russia and China kickstarted talks to develop a new reserve currency with other BRICS countries in a challenge to the dollar’s dominance.
The new reserve unit would be based on a basket of currencies from the group’s members: Brazil, Russia, India, China, and South Africa.
The dollar’s reign as the chief reserve tender is already on the wane as central bankers diversify their holdings into currencies like the Chinese yuan, the Swedish krona and the South Korean won, according to the International Monetary Fund.
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Higher interest rates in the US weigh on oil prices because they curb consumer demand and drag on economic activity. They also strengthen the dollar, which can pull down prices for Brent and WTI that are denominated in the US currency.
“While better US economic data should mean better oil demand, the concern is that this forces the Fed to overtighten monetary policy to bring inflation under control,” UBS analyst Giovanni Staunovo said earlier this month.
Another factor is the growth in US crude inventories, which have logged nine weekly rises in a row. Supplies are now over 15% higher than they were last year, according to FXPro.
Crude’s losing streak comes even though China has started to rapidly reopen its economy after nearly three years of strict zero-COVID lockdowns. Some strategists expect it could boost global demand and fuel a price rally, and Vitol CEO Russell Hardy has said it could push oil demand to record highs later this year.
But many analysts expect oil prices to rally again once Russia starts cutting its production levels. Moscow said earlier in February that it plans to cut its oil output by 500,000 barrels a day in March, as Ukraine sanctions hit its ability to find willing buyers.
Those Russian output cuts would squeeze global supply tighter, and that would drive prices higher as long as demand continues to hold up.
“We believe that the tightening of the oil market this year will eventually put prices on an upward trajectory,” UBS CIO Haefele said. “Russia’s announcement last Friday of an output cut in March is a reminder of these dynamics.”
