Oil prices tumbled to their five-year lows of around $65/barrel recently and no, that ain’t just a Black Friday discount. As it turns out, the Organization of Petroleum Exporting Countries decided against implementing measures to curb the sharp decline in crude oil prices, as they refrained from announcing a cut in production.
Several forex market participants, along with most OPEC member nations, were counting on the oil cartel to reduce production by 5% or 1.5 million barrels per day. In doing so, oil supply could be limited, which would then put an upward pressure on prices. In a surprise move, the OPEC refrained from making any changes to their production target, as the cartel failed to reach an agreement.
Apart from weighing further on oil prices, here are a few more longer-term market repercussions of their decision (or lack thereof):
1. Price war between the U.S. and OPEC
Industry experts remarked that the OPEC’s inaction marks the start of an oil price war with U.S. producers. You see, the recent boom in fracking for shale oil in West Texas have allowed U.S. oil supply to reach its highest level in three decades, threatening to eat up the global market share of the OPEC’s oil output. For now, the OPEC accounts for roughly 40% of the world’s oil supply, which could shrink if U.S. ramps up its production.
By keeping its oil production unchanged, OPEC seems to be edging out U.S. competition by pushing prices to unprofitable levels. Energy consultants from Citigroup and IHS predict that big U.S. oil producers could still stay profitable and carry on with operations for as long as crude oil trades around $70/barrel. Some say that further technological advancements could bring the breakeven price down to as low as $40/barrel in the coming years, which suggests that these U.S. oil producers aren’t closing shop anytime soon!
2. More geopolitical tension?
Apart from the conflict between U.S. producers and the OPEC, geopolitical tension among sanctioned countries, namely Russia and Iran, could escalate if oil prices fall further. Recall that the EU and the U.S. imposed sanctions on Russia because of the Ukraine standoff earlier this year while international sanctions were also imposed on Iran because of its nuclear program.
Oil and gas comprise nearly 70% of Russia’s exports and 50% of its federal budget, with the Russian economy and the rouble also in a nosedive along with oil prices. Meanwhile, oil production in Iran has hit a 20-year low, as exports were cut in half to just 1 million barrels per day. Despite these economic pains, leaders of both countries insist that they will not give in to Western demands just to have the sanctions lifted.
3. Deeper Loonie selloff?
As we’ve discussed in the School of Pipsology, the Canadian dollar is positively correlated to crude oil prices since Canada is one of the top producers in the world and is a major exporter to the United States. With that, further declines in “black crack” prices might continue to weigh on the Loonie, which tumbled against most of its forex counterparts after the OPEC announcement.
With the recent boom in U.S. production, the country is relying less on its crude oil imports on Canada. And that can’t be good for the export-driven Canadian economy, which used to have nearly 85% of its oil shipments going to Uncle Sam!
4. Cheaper gas prices, more cash for shopping
On a brighter note, the slip n’ slide in oil prices is making gasoline much cheaper at around $2.77/gallon. According to AAA, the largest motoring group in the U.S., average gas prices are at their lowest levels since October 2010.
With that, consumers can keep filling up their tanks and still have enough cash left for shopping! I wouldn’t be surprised if Black Friday and Cyber Monday raked in more sales this year, as Americans probably used their extra moolah to take advantage of those deals and discounts. Heck, spending could continue to climb as the December holidays draw near!
In a nutshell, these recent events suggest that oil prices might not bottom out anytime soon if price wars between the U.S. and OPEC persist. This could keep risk appetite, commodity prices, and the Canadian dollar weak in the coming months. Do you think this will be the case?