In an industry where the US dollar (USD) is king, foreign exchange (FX) markets can make a significant difference to many oil and gas firms’ bottom line during extreme market volatility and economic uncertainty.
Indeed, it’s hard to think of many trades that are defined so greatly by one currency and where one upset apple cart can have such overarching implications.
When you take the upcoming US election and continued Brexit uncertainty and mix them with the ongoing financial turmoil caused by Covid-19, there aren’t many reasons for the sector to be optimistic.
The trade-weighted USD index, which measures the currency relative to a basket of other majors, is currently at its lowest level since May 2018.
That’s despite the Covid-19 pandemic causing it to reach its highest point since 2016 in March this year. At the same time, the British pound (GBP) to USD exchange rate also fell to 1.1418, the lowest level since 1985 and the days of Reaganomics.
To put that in context, the 10-year average exchange rate is 1.4547.
The issue is not so much with the USD falling, but that it’s becoming increasingly difficult for operators to predict when the next spike may occur, if at all.
As Covid-19 forced the world into lockdown, the GBPUSD exchange rate experienced record volatility, falling from 1.3191 on the 9th of March, to 1.1418 in less than a fortnight.
It’s since bounced back, and at the start of September, was trading at around 1.3500—the highest level since the Conservatives won a majority in December. By mid-September, Cable had dipped to levels as low as 1.2767.
These events should be a wakeup call to oil and gas firms to identify and fill gaps in their workforce to make sure they’re ahead of the curve.
Having an FX specialist on hand to help navigate volatility and assist in market timing can be key in allowing operators to focus on day-to-day operations, rather than trying to be an FX expert. Having a relationship built on trust and proactivity, rather than being left at the mercy of an online platform, is paramount to weathering the FX storm.
Oil and gas companies without an FX specialist may have missed out on the opportunity to not only profit from a stronger USD but, more importantly, be protected from a falling dollar. Most banks offer currency as a branch of their services, and therefore while there’s often an online platform, they may not be able to offer a personalised service to assist when major shifts occur, or put appropriate hedging policies in place.
We’ve moved beyond the USD appreciating as a risk-off play, to it depreciating because of the Covid effect on the US economy. With real interest rate yields collapsing across the pond, investors are now looking to the euro and others as their currency of choice.
Speculation makes up a large portion of currency trading; the market is hugely complex and investors can be fickle.
Moreover, with everything else currently going on in the world, the uncertainty of the US election—especially one that promises to go down to the wire—is unwelcome to say the least.
Ahead of most votes, you can make a rational punt as to who might come out on top, and although Joe Biden seems to be edging it in the polls, it’s still all to play for.
Traders and investors don’t appreciate the uncertainty that the spectre of political change generates.
Unpredictability often spells downside for a currency—you only need to look at the way the pound has reacted to Brexit instability in the past few years. GBPUSD was trading at around 1.5000 in the hours before the Brexit referendum. It could be argued that in the run-up to Americans heading to the polls on the 3rd of November, the USD will continue to face volatility.
We’re also moving ever closer to the Brexit deadline of the 31st of December, and we’re yet to see a firm trade deal in place. Again, the closer we get, the more volatility the pound will likely experience.
In our experience at Global Reach, anyone receiving USD income but having non-USD expenses takes the volatility hit and could see their bottom line eroded by currency swings.
But it doesn’t need to be like this; with Global Reach’s help, UK oil operators can devise intelligent hedging strategies to suit their business, and capitalise on positive shifts while protecting their bottom lines. UK oil and gas operators should focus not only on making the most of the opportunities that will arrive post-Covid, but also those that present themselves during the pandemic.
If you’re concerned about the impact recent volatility is having on your business or want to find out more about how to manage your FX during your M&A activity, Global Reach can help. Contact Daniel Harden on DHarden@globalreachgroup.com or +44 (0)20 3465 8202 for a free, no obligation review of your current FX exposure.