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Late last week, the Organization of the Petroleum Exporting Countries (OPEC) shot down requests from Saudi Arabia, Kuwait, Qatar, and UAE to increase oil production from 25 million barrels per day (bpd) to 30.87 bpd. The mini-bloc got outvoted by the rest of the OPEC members and as a result, no new agreements and quotas were set in place.

The opposition, led by Iran, argued that an increase in the supply of oil could lead to a collapse of oil prices.

However, Saudi decided to go off on its own route and announced that it would be raising its own oil production from 8.8 million bpd in May to 10 million bpd in July.

So why would Saudi Arabia go ahead and defy OPEC, risking the chance of the evil Empire Striking Back? (oops, too much Star Wars for me lately). My feeling is that Saudi Arabia wants to help cover for the slack in production from other oil-producing countries.

Political turmoil in Libya, Yemen and Syria have reportedly taken off a combined 1.6 million bpd off the world market. With India and China opening up their wallets to import oil, Saudi Arabia argues that there is a need to meet the rising demand. After all, competition with other energy alternatives is already heating up and the giant oil producer doesn’t wanna get burned like the Heat (pun intended).

If Saudi Arabia increases its production, it will also help stabilize oil markets. Remember, rebellions and political uncertainty in the Middle East have led to wild movements in the price of oil. Increasing production to meet rising demand would help stabilize oil prices and limit the effects of speculative trading by hedge fund managers.

So are we seeing the first of the many times we’ll see Saudi flex its political (and economic) muscle? After the kingdom announced its decision to step up its oil production, black crack prices fell below the psychological $100 per barrel mark, and weighed on the oil-related Loonie.

USD/CAD and Oil

As we can see in the chart above, the Loonie received a boost early in the New York session when Canada printed strong employment figures. A couple of minutes later though, the dollar rallied strongly against the Loonie just as crude oil tumbled below $100 per barrel. Of course, it didn’t help that risk aversion set the tone of the U.S. session.

For the next couple of days, USD/CAD will most likely dance to the tune of dollar sentiment, but make sure you also keep close tabs on oil price movements. We don’t know yet how the OPEC will react to Saudi’s bold move, and we might see increased tension within the organization and increased volatility in the oil market. Don’t be surprised if we see strong moves in both oil and USD/CAD!