Oil prices burst through support and sprung a major leak yesterday. The price plunge continued overnight until finding a modicum of support on broad U.S. dollar weakness. Unfortunately, the steep price drop in West Texas Intermediate (WTI) thwarted Canadian dollar gains, despite the
greenback’s losses against the Australian and New Zealand dollars.
WTI prices have dropped 12.1% since December 4. The Bank of Canada is very concerned about the damage to the Canadian economy from the plunge in crude prices. Governor Stephen Poloz told the Globe and Mail yesterday that BoC staff were preparing an analysis of the impact which will be released on January 9. The oil price fall has already taken a toll. The BoC downgraded the interest rate hike outlook because of the "material decline" in oil prices.
Canada’s oil price woes stem from a transportation problem. There isn’t enough pipeline or rail capacity to ship the Alberta production. In addition, new pipeline projects are being blocked by British Columbia and Quebec, making it difficult for Alberta producers to ship to foreign
markets. However, many external factors are weighing on oil prices.
The Organization of the Petroleum Exporting Countries and Russia announced crude production cuts of 1.2 million barrels per day at the beginning of the month. Iran oil shipments are under sanctions. Libyan oil production has been curtailed, and Alberta cut production by 325,000 barrel/day. Altogether, these actions should have underpinned prices or forced them higher. That didn’t happen. These initiatives were swamped by escalating fears of a global economic slowdown, sparked by the U.S. and China trade war.
In addition, the International Energy Agency in Europe and the Energy Information Administration in America warned of another supply imbalance in 2019. They said that rising U.S. shale production combined with an economic slowdown would more than offset the production cuts elsewhere and lead to supply outpacing demand. The The oil price outlook has undermined the Canadian dollar, especially since the Bank of Canada cited oil prices as a significant concern.
However, the Canadian dollar may get a reprieve from the U.S. Federal Open Market Committee (FOMC) policy statement and press conference on Wednesday. The FOMC is widely expected to raise U.S. interest rates by 0.25%, an outcome that is fully reflected in current FX prices.
Analysts are concerned that the Fed may adopt a "dovish" outlook and reduce the number of rate hikes in 2019. U.S. equity markets have plummeted in December and raising rates could exacerbate the drop.
Canadian Manufacturing shipments data are due today and forecast to rise 0.4% compared to the 0.2% gain in September. The Canadian dollar may squeak out a small gain on the back of better than expected data and a rebound in oil prices.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
