The price of oil is nearing record highs in euro terms, posing a further risk to already-fragile European economies but providing support to oil-linked currencies like the Russian ruble, analysts say.
Because oil is traded in dollars on the global market and the euro has depreciated in value against the dollar in recent weeks, individuals and companies in the euro zone have seen their energy costs rise, even though consumption has shrunk as the region likely heads toward recession.
"While demand for oil in Europe has been declining at a fast rate in recent months due to the deceleration in economic activity, Europe's oil bill has not, due to high energy prices," Bank of America Merrill Lynch said in a note to clients.
The higher fuel costs for euro-zone consumers—taking a chunk out of their disposable incomes, much like an added tax or an interest-rate rise—risk creating a negative feedback loop for the beleaguered region by pushing the euro even lower as economic growth wilts, and in turn lifting consumers' oil prices further.
The price of Brent crude rose 89 cents a barrel to $111.55 on Thursday, which translates to more than €86 a barrel, within sight of its record high of €92.55 in July 2008.
Although the euro has rebounded from the 16-month lows registered against the dollar last week, and it climbed back above $1.29 Thursday, it is still more than 5% below where it was three months ago.
The price of oil, meanwhile, remains well supported amid political tensions between major oil producer Iran and the West. All other things being equal, a weaker euro tends to weigh on the price of oil, because it hurts European demand. But the tensions with Iran, which are causing supply concerns, have overridden any effects of a weaker euro on the global oil market. And that is causing pain for the euro-zone.
"A round of higher oil prices or even higher oil prices in euros, could deepen Europe's recession," Bank of America Merrill Lynch said in its note.
Jean-Claude Juncker, president of the Eurogroup of euro-zone finance ministers, said Wednesday that the euro zone was already on the brink of a technical recession.
Things could get even tougher.
Swiss bank UBS this week slashed its current three-month forecast for the euro against the dollar to $1.15 from a previous $1.35, while Goldman Sachs last week raised its expectations for Brent crude over the same period by 2% to $120 a barrel.
But what's bad for one currency could be a boon for others, like the ruble. Because oil is Russia's main export, the ruble tends to climb along with crude prices.
Since the year started, the ruble has risen around 3% against the dollar, despite growing political unrest. Fitch Ratings' announcement Monday that it was cutting its outlook on Russian's credit rating failed to dent the Russian currency., which instead rose in tandem with the oil price.
