Movements in the Oil Complex

October 31, 2014

By: Jordan Sartor

Crude prices have fallen below $80 (U.S) a barrel in trading on Monday, with projected forecasts to fall even lower. Goldman Sachs predicts crude prices could plunge below $70 by next spring, only to reach $80 again by 2016. The grim forecast is due to the inevitable slowdown in US production and overall global supply. Contrary to popular belief only 5 years ago and fears of peak oil, today’s oil supply far exceeds any prior forecasts. Unconventional oil, such as shale oil and the oil sands, as well as advances in technology, have pushed global supply beyond anyone’s projections. The US, which experienced its peak oil production in the early 1970s, with a slow decline since, is now the world’s fastest growing crude producer. With global supply at nearly an all-time high and global demand stagnant due to sluggish economic growth, prices have fallen drastically. Even as late as September 2013, oil still hovered around $120 a barrel; the sudden crash in price is not without consequence.

“Falling oil prices will help consumers but represent a net downside risk for Canada’s economy,” Moody’s Analytics economist Alexander Lowy added in a note to clients.  The Bank of Canada highlighted the risk in its latest economic update last week, noting that “while lower oil prices would benefit consumers, their effect on Canada would, on balance, be negative.” As our country is dependent upon exports, especially crude, and lower prices can have a detrimental impact. Turning to the oil sands, reduced prices have pinched out high-cost players, caused delays in projects across many organizations and forced even the largest companies to focus on projects with lower costs and higher returns. The free ride is over – if prices remain consistent. Falling commodities and crude prices have also weakened our dollar, failing to keep pace with our US counterparts.

The slide has seen many leading Canadian energy companies to experience significant losses in share price. The S&P/TSX Energy Index fell 3% on Monday, capping off a string of losses that erased gains built up in the first half of the year. With many producers in Canada and the US operating at breakeven costs at $70-$80 a barrel, a continued slide can only spell trouble. Consumers feel great at the pump, but the effect on our economy is anything but encouraging.

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