Natasha Lala of OANDA Solutions for Business examines how finance, accounting and treasury professionals in oil, gas and mining businesses are managing their FX exposure.
As if connected by string, FX and commodities are dependent upon, and often victim to, each others movements. Take the price of crude oil which, in the last few days, hit a six-month high of $46 a barrel following the first US crude draw in six weeks. This comes just after a recent plunge to under $40 a barrel. In countries where currency and oil are closely linked, this can be a nightmare. Russia is a prime example of a nation that has an extremely strong commodity-forex relationship. As one of the world’s largest commodity exporters, any sharp rise or fall in the Ruble can have a knock-on effect on the price of crude oil. A shock decision therefore by Putin, which depreciates the Ruble’s value, could cause serious volatility in the oil markets.
Furthermore, gas prices are globally priced in US dollars, much like gold. A volatile dollar will affect the whole industry, from refining to transportation. Any company exposed to gas trying to manage this will be affected by any significant shift in the dollar. Similarly, in mining, currency movements of the large scale producers act as a hedging tool against price movements. This is because producer nation’s currencies are intrinsically linked to the mining and will fall in line with a plunge in prices. However, quantitative easing in mining heavy countries such as Japan and across Europe for the last few years has removed this ‘natural hedging’. Companies in the mining industry therefore feel much more of a currency impact.
Clearly, FX volatility causes problems across oil, gas and mining – so, how can finance teams within these firms hedge against FX volatility?
A good starting point is taking advantage of futures and options to hedge against volatile prices. For example, if a treasurer or financial controller exposed to the US dollar locks in through a futures contract a favourable dollar/sterling price, then they can avoid volatility headaches and rest assured that, assuming they locked in the right price; they will not be affected as greatly by price swings.
In addition, finance professionals within an oil, gas or mining firm must also ensure that they have the most accurate FX rates. Unexpected fluctuations in a currency can, as explained above, cause serious volatility in commodities, notably oil. Therefore, companies should ensure they have a wide data pool so that they can keep their eye on global currencies. Companies should also consider automated data feeds and an integrated data platform with the latest rate information, analytics tools, and a continuously updated FX data feed.
Ultimately, when it comes to the relationship between FX and oil, gas and mining – you can’t have one without the other. As a result, companies should look to hedge their bets, ensure they have a wide pool of FX rates and automated exchange rates, and make the most of futures and options to prevent major currency swings spoiling the day.
This article is for information and discussion purposes only and does not form a recommendation
to invest or otherwise. The value of an investment may fall. The investments referred to in this
article may not be suitable for all investors, and if in doubt, an investor should seek advice from
a qualified investment adviser. More