Iraq’s dollar detour: The possible impact on global oil prices

Iraq has decided to plan bans on cash transactions involving U.S. dollars, as of January 1, 2024.

While this decision is expected to have implications in regard to the nation’s international trade relations, Iraqi economy, and more, Trading.biz analyst Rahul Nambiampurath focuses on the expected volatility surrounding the global oil market.

As oil is traded internationally, using the U.S. dollars, Iraq’s ban can lead to increased price volatility in the concerned space, mentions Rahul.

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He believes that the ban could weaken the dollar dominance and create a more stable transactional environment between the non-dollar countries, leading to a more stable demand for oil and therefore a foray toward higher prices. But there are other aspects in play.

History of prices: Brent

For instance, the BRENT Crude prices as of January 1, 2024, opened at $75.75, and at press time, the same was already up close to 1.5% — sitting at $76.892.

When compared to the prices on January 1, 2023, there has been a year-to-date dip of 0.81%. While 2023 started strong with the global oil demand rising by 2.3mb/d, the United States’ output record of 20mb/d created a non-OPEC+ supply pressure, lowering the prices by almost $25/bbl from the September levels to December 2023.

This positive non-OPEC+ supply pressure could keep the prices in check, offsetting some price spikes that can happen with Iraq banning USD transactions.

Possible impact of Iraq’s decision

Other notable impact areas, courtesy of the USD ban in Iraq include the following:

• A major shift in trade dynamics with the world being on the lookout for new currencies to transact.
• A negative impact on Iraq’s export volume is if buyers find it more complicated to transact using non-dollar currencies.
• Broader geopolitical implications with Iraq siding with other countries that have tried to lower their USD dependence.
• Possible decrease in oil prices apart from non-OPEC+ pressure, led by increased conversion costs due to non-USD transactions.

Let us now shift focus to the daily BRENT chart, which seems to have recently broken out of the Head-and-Shoulders pattern. The dip was followed by the BRENT prices making lower highs.

However, if you look at the momentum, courtesy of the Relative Strength Indicator, the bullish divergence is clear. This can push the BRENT prices higher, with the 2024 level expected to find resistance at $86.93.

Even the relative volatility index seems to be surging, which is in line with expectations following Iraq’s anti-USD stance.

Rahul’s analysis is in line with Goldman Sach’s prediction of $70 to $90 per barrel. While analyzing the global oil prices, other players, apart from BRENT, need to be considered. For instance, General Crude shed 10.17% in 2023, which could be due to countries like the United States topping oil production.

Regardless of how things move from here, expect the oil prices to be an interplay of the global economic trends and the international supply-demand balance.