Is the Twilight of the Petrodollar well-nigh?

By Sajjad Khan


Saudi Arabia is actively considering accepting yuan instead of dollars for oil sales to China, The Wall Street Journal confirms.

The discussions between the Kingdom and Beijing officials began over six years ago, but recently intensified amid the growth of tensions between the U.S. and China. The proposal was also driven by the consistent decrease of Saudi Arabian oil importance on behalf of the U.S. as it simultaneously grows for the Chinese.

“The dynamics have transformed. The U.S. relationship with the Saudis has changed, China is the world’s biggest crude importer, & they are offering many lucrative incentives to the kingdom,” said a Saudi official familiar with the talks. “China has been offering everything you could imagine to the kingdom.” 

The tension began shortly following a decrease in weapon sales & removal of defensive patriot missiles. Saudi ministers criticized the Biden administration’s current U.S. Mideast policy, deeming them “muddled” & “confused.” Relations with the U.S became even more strained after the Biden administration released a report suggesting Saudi Arabia's Crown Prince Mohammed Bin Salman’s involvement to the 2018 killing of Saudi journalist Jamal Khashoggi. Clearly, the relationship between Biden's White House is not as cordial with Saudi Arabia as Trump's.

My Take:

With import of 21%, Japan is Saudi Arabia's largest crude oil importer, followed by China at 17% & the U.S. is 3rd at 15% of total export.

There is a hidden string that ties currencies to crude oil. With the price actions in one venue, it forces a sympathetic or opposing reaction in the other. This correlation persists for many reasons, including resource distribution, the balance of trade (BOT), & market psychology.

Also, there is crude oil’s significant contribution to inflationary & deflationary pressures that intensifies these interrelationships during strongly trending periods—both to the upside & to the downside. We quote crude oil in U.S. dollars (USD). So, each uptick & downtick in the dollar or in the commodity's price generates an immediate realignment between the greenback & many forex crosses. These movements are less correlated in nations without significant crude oil reserves, like Japan, & more correlated in nations that have significant reserves like Canada, Russia, and Brazil.

Crude oil shows a tight correlation with many currency pairs for three reasons. 1st, we quote the contract in U.S. dollars, so pricing changes have an immediate impact on related crosses. 2nd, high dependence on crude oil exports levers national economies to uptrends and downtrends in the energy markets. And 3rd, collapsing crude oil prices will trigger sympathetic declines in industrial commodities, raising the threat of worldwide deflation, forcing currency pairs to reprice relationships. Expect crude oil to trade in U.S. dollars into the future, as the world recovers from the pandemic.


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