Colombian Peso Soars on News of Global Oil Production Cuts

With strong oil prices come a strong Colombian peso. The ties between the two have been on full display since both plummeted in value in late 2014, so it was no surprise to see the Colombian peso gain strength in recent days as both OPEC and non-OPEC nations agreed on production cuts that sent oil to an 18-month high.

Despite nearly going over 3,200 to the U.S. dollar late in November, the news of an agreement has brought the Colombian peso back under 3,000 to the dollar for the first extended stretch since October. It was trading at 2,986.50 to the dollar as of 10:30 am on Tuesday morning.

This was the first agreement to limit output by the bulk of the world’s top oil-producing nations since 2001, pushing Brent crude to a high of $56.36 USD per barrel. It has since settled and was trading at $55.69 on Tuesday morning.

The Colombian peso was further aided by a drop in the dollar ahead of today’s Federal Reserve meeting in Washington. The market is expecting an interest rate raise — which would only be the second since the 2008 global financial crisis.

Despite nearly nearly hitting 3,200 to the U.S. dollar in late November, the OPEC and non-OPEC agreement has brought the Colombian peso back under 3,000 to the dollar for the first extended stretch since October. (Source: XE.com)

This weekend’s formal agreement by non-OPEC nations to curb production comes not long after OPEC producers had decided to reverse course and limit their output. The combined pledges, if fully realized, will take some 1.5 million barrel per day out of the market.

Saudi Arabia, in a surprising willingness to curb its output, leads the way with planned cuts of 486,000 barrels per day. The nation’s top oil official says they will lower production even more in the new year. “I can tell you with absolute certainty that effective January 1 we’re going to cut — and cut substantially to be below the level that we have committed to on November 30,” said Khalid al-Falih, Saudi Arabia’s oil minister, per Bloomberg.

The Russia, a non-OPEC country, will slash production by some 300,000 per day, while Iraq (OPEC) will reduce its production by more than 200,00 per day. United Arab Emirates (139,000 per day), Kuwait (131,000), and Mexico (at least 100,000) have also made significant commitments.

Other large oil producers, including the United States, China, Canada, Brazil, Norway, and Colombia Norway and Brazil, are not involved in agreement, however. This leaves the U.S. shale market as the biggest uncertainty in terms of how the market will shape up.

With small rigs and operations that can be ramped up relatively rapidly, many analysts believe the higher prices will simply entice more drillers who had shuttered their wells over the past two years due to low prices to start producing again. So while this is good news for the strength of the Colombian peso, it is also being eagerly received by those in U.S. shale. Their response will have significant medium-term effects on the price of oil and the value of Colombia’s currency.