Crude oil prices have been drifting close to their lows this year, causing oil-producing nations to worry about another leg lower and potentially weaker economic growth. With the Organization of Petroleum Exporting Countries (OPEC) gearing up for a much-awaited announcement next week, forex market watchers can’t seem to stop talking about a potential cut in production and its likely effect on the Canadian dollar.
Huh? What does oil have to do with the Loonie?
If you’re a newbie forex trader just tuning in, lemme give you a quick rundown on why crude oil prices typically affect the Canadian dollar. As discussed in our School of Pipsology section on Intermarket Correlations, Canada is one of the top producers of oil in the world and its economy relies heavily on its energy exports.
Oil diggers in Canada are then able to rake in higher profits when prices are up, encouraging them to boost production and hiring, thereby allowing the economy to function smoothly like a well-oiled machine. On the other hand, falling oil prices mean lower revenues and an economic slowdown like what’s happening in Canada lately, which isn’t too good for the Loonie.
What’s been happening lately?
Industry reports have been coming in mixed, with some suggesting that oil demand could weaken next year and others easing fears of a supply glut. Earlier this month, the International Energy Agency (IEA) predicted that global oil demand would slow further in 2016 to just 1.2 million barrels per day due mostly to the downturn in Asian powerhouse China.
Meanwhile, news of oil rig cuts in the U.S. affected the other side of the oil price equation, hinting at a potential reduction in supply. In addition, analysts speculated that airstrikes near ISIS-controlled oil fields in Syria might put a bit of a dent on production, keeping prices supported as well.
So far, WTI crude oil has broken below a near-term support level at $44/barrel last week and is bouncing back and forth between $40-42/barrel. Brent crude oil is also in consolidation mode at $44-45/barrel, also edging close to its 2015 lows near $42/barrel.
So what will the OPEC do next?
Market watchers are now turning their attention to the upcoming OPEC statement, during which the heads of the oil cartel are expected to announce their target production levels. Keep in mind, though, that the gang has refrained from announcing supply cuts throughout the oil industry slump this year so it’s likely that they’re sticking to their guns again.
Of course some of the member nations have been urging for a collective reduction in oil production, which could then allow prices to regain ground. However, top dog Saudi Arabia has been pretty stubborn, insisting on maintaining their level of production in order to retain its competitiveness and market share.
Some analysts say that this meeting might turn out differently, as Saudi Arabia is already feeling a lot of pain from the oil price slump, possibly convincing them to shift their hardline stance. Their economy is also reeling from lower oil industry revenues, forcing their government to curb infrastructure spending due to growing budget deficits.
Besides, Saudi Arabia’s plan of driving some of its competition out of the market already seems to be playing out, as several U.S. oil rigs have recently been shut down on the lack of profitability. With that, it wouldn’t do much harm for the OPEC to announce and oil production cut and allow the Loonie to recover against its forex peers.