Oil below $40 US a barrel is reverberating through the oilpatch and the economy
CBC News Posted: Aug 26, 2015 11:45 AM ET Last Updated: Aug 26, 2015 4:27 PM ET
The Canadian dollar recovered to just above 75 cents on Wednesday amid continued stock market volatility.
The loonie was at 75.05 US cents at the close, up slightly from 74.96 at yesterday’s close.
But the trend for oil was not so positive as traders digested news about high stocks of gasoline and other petroleum products in the U.S.
West Texas Intermediate oil contract was down 46 cents at $38.85 US a barrel, continuing its sojourn below the psychologically important $40 level.
Brent crude, the most important international contract, edged up to $43.49 US a barrel.
Jitters about the slowing Chinese economy continued to hurt oil, asChinese stock markets were hit by waves of selling today.
If China’s economy is slowing, that means it will likely buy less crude oil in the coming year.
The loonie has been beaten down by the stock market turmoil and the prospect of less demand for Canadian resources from China. But going forward the main risk is the trend in interest rates.
Some analysts say it is less likely the U.S. Fed will raise rates in September because of the market meltdown. The Bank of Canada has made two rate cuts this year, helping to pressure the Canadian currency, but if the Fed doesn’t move, that could bring some relief for the Canadian dollar.
Low oil hurts oilpatch
The international glut of oil has brought oil prices lower for the past seven weeks. Output by the Organization of Petroleum Exporting Countries is at record levels and rumours that the oil cartel might hold an emergency meeting to cut back output have been refuted by Saudi Arabia.
Meanwhile, the U.S. Energy Information Agency reported that crude oil inventories decreased by 5.5 million barrels last week, but oil in storage remains at levels not seen in 80 years. At the same time, stocks of gasoline and other distillates are growing.
Some analysts said the latest decline in crude stocks might have been an aberration driven by a brief dip in imports. Most are bracing for a sustained rise in stocks in coming months as U.S. refiners shut for seasonal work.
“We had a draw, but the market needs to see weeks of that to be convinced,” said Gene McGillian, senior analyst at Tradition Energy in Stamford, Conn.
The impact of low oil is reverberating through Canada’s oilpatch as Canadian companies make plans for 2016.
Every year, companies hire outside evaluators to tally up their reserves — a calculation of how much resource in the ground can be recovered technically and economically. This year, much of the oil they might have in reserve may not be viable to produce at current prices.
That may mean a raft of reserve reductions that companies may have to write down in their financial results later this year. That in turn could lead to less investment over the coming year, which will hurt Canada’s economy.
“It all sort of feeds itself in an ugly vicious cycle,” said Sonny Mottahed, CEO of Black Spruce Merchant Capital.
Elsewhere, there are reports the Saudi government may be faced with a deficit for the first time in years and may have to make budget cuts because of low oil prices.