Tags: Russia | oil | currency | war

There's a War Going On in Oil

By    |   Monday, 20 Oct 2014 08:21 AM

In times past, wars were mainly fought on the battlefields with guns, tanks, etc. However, today wars get waged using currencies or even things like commodities.

Well, right now, we're seeing a war and the weapon of choice is oil.

On one side of the battle we have the U.S. and Saudi Arabia. On the other side are the people that hate the U.S. the most and are in some ways competitors of Saudi Arabia, such as Russia, Iran and Venezuela.

How did all of this go down? Well, Secretary of State John Kerry went to Saudi Arabia a few weeks ago. He talked Saudi Arabia into flooding the markets with excess oil to cause the price of oil to fall.

This move was done to cause a direct blow to Russia. The U.S. hasn't liked how Russia has been defiant in its dealings with Ukraine. So how do you hit Russia hard? You wage war on their pocketbook.

Russia is a huge commodity exporter, particularly in oil. As the price of oil takes a hit, it dries up the funding that Russia gets from oil. It's like cutting off the spigot.

Then as a side effect to the direct hit on oil, investors lose faith in Russia, which is shown by the steep sell-off in the country's currency, the ruble.

So now, Russia's central bank literally has to spend billions, intervening in the currency market as it sells dollars and buy rubles to try to support its currency, which has been to no avail so far.

This really puts the heat on Russia because it ends up being an attack on two fronts, its oil revenues and the value of its currency.

To counter act all of this, Putin has been talking to China. And China is coming to the rescue.

China is increasing its direct, non-dollar trade with Russia through a 150 billion yuan currency swap deal. This allows Russian rubles to be directly traded for Chinese yuan without going through the U.S. dollar.

In addition to this, China signed 38 deals with Russia to export things like agricultural products and oil and gas equipment.

Naturally, all of this is meant to take a punch at the dollar and to drive up the euro, which would hurt Europe right now since its softer economy could use a weaker euro at the moment.

So this oil war has bled over into a currency war, making it a war on many fronts. How far could it go?

Well, we have some clues on how low Brent crude oil could go by hearing what Saudi Arabia said about oil. They've said that they're willing to accept oil prices below $90 per barrel and perhaps down to $80 per barrel for as long as a year or two, according to Reuters.

Since Putin knows all of this is coming now, he's trying to get rid of his dollar dependence as quickly as possible. For instance, Russia just paid down $52.8 billion in foreign debt at a near-record pace.

So we're going to see a lot of back-and-forth chess plays between these countries during the upcoming months and possibly for the next year or two. It's no doubt going to cause some added volatility in the oil market, but that also will bring about great opportunities as well.

If you'd like to know more about how to maneuver through these times with your stock investments, check out the Ultimate Wealth Report.

God bless!

About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust.
Click Here to read more of his articles. He is also the editor of Ultimate Wealth Report. Discover more by Clicking Here Now.

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SeanHyman
In times past, wars were mainly fought on the battlefields with guns, tanks, etc. However, today wars get waged using currencies or even things like commodities.
Russia, oil, currency, war
621
2014-21-20
Monday, 20 Oct 2014 08:21 AM
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