Late Monday, Saudi Arabia said it would start selling its oil in the U.S. market for the cheapest price it has offered in more than four years.
The loonie was down 0.41 of a cent to 87.63 US at the close of trading.
Oil prices have fallen sharply this year, particularly in recent months — the U.S. contract was trading at $100 a barrel as recently as July.
Saudi Arabia has tried to preach patience, but the message hasn't been well-received by its OPEC partners, as most depend on that revenue to keep their government coffers full of cash — and keep their grip on power.
Saudi Arabia has more oil reserves than any other country, and is head of the OPEC cartel. In the past, the country has been willing to cut its production to compensate for oversupply elsewhere.
But now Saudi Arabia is worried about losing market share thanks to a surge in U.S. shale production. A theory circulating in oil circles suggests that the Saudis are willing to see the price of oil temporarily sink in order to curtail new U.S. production, at least temporarily.
"That's really the big question facing the market, what will OPEC do?," Citigroup's energy future special Tim Evans said in an interview. "Will they come to the rescue?"
"There's no clearly defined floor price especially in the short term … it's hard to say exactly where the line that will not be crossed is," Evans said.
Crude awakening
Last month, the U.S. produced more oil than Saudi Arabia did. That's the first time that's happened in more than 40 years, and it's been playing havoc with the power dynamic in the oil world.
The December crude contract in New York fell $1.59 to $77.19 US a barrel on Tuesday, but trading at some points below $77.
As crude is priced in U.S. dollars, its affordability has been affected by the stronger greenback, a result of the U.S. Federal Reserve ending its quantitative easing program. At the same time, world demand for oil is slowing because economic growth is slow.
Lower oil prices may sound great for consumers eager to hoover up savings on heating costs, gasoline, and jet fuel surcharges while travelling. But the reality of plunging oil prices could have some dire consequences for many parts of the economy.
The Canadian dollar, which is strongly correlated to oil prices, sold off heavily on the news, trading hands at 87.60, down almost half a cent on the day. That's the lowest the loonie has been since the summer of 2009, when Canada was emerging from a devastating recession.
The weakness in the loonie came a day after Canada's currency lost about two-thirds of a cent after the head of Canada's central bank gave a speech that gave a relatively bleaker read on Canada's economy, noting that other exports aren't picking up the slack of the weakness in oil.
"A snowballing effect is what we are seeing in crude oil price today," said Fawad Razaqzada, an analyst at Forex.com. "News that Saudi has cut its asking price to customers in the U.S. suggests even the largest OPEC producer is now worried about its market share. This does not bode well for the future of the cartel."
OPEC is scheduled to meet at the end of this month to discuss the issue.
There's expected to be a call from some OPEC nations to cut production in order to raise prices, but that's going to be a tough sell for those countries that are already feeling the squeeze of drying up oil revenues, who won't be eager to sell less oil so that the cartel as a whole will be better off as a result.
But Evans suggests it's likely OPEC will agree to turn off the spigots a little. They currently pump out 30 million barrels a day, and he thinks they'll likely agree to ratchet that down to 29.5 million, which should help prices.
'It's been my experience that the weaker the oil price, the stronger the co-operation in OPEC," Evans said. "They're going to say 'we all need to cooperate or everybody goes broke'."
Original Article
Source: CBC
Author: Pete Evans
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