Oil prices, which have been rising for months and stoking inflation in Canada and around the world, have abruptly reversed course, plunging to just below $100 (U.S.) a barrel on Thursday amid signs that the global economy is slowing.
The sharp drop in one of Western Canada's most important export products is being attributed to a number of factors. Since last fall, oil has marched swiftly from $80 a barrel to more than $110 because fast-growing Asian and South American countries were hungry for fuel, while civil war in Libya has raised concerns about supply.
But recent moves by policy makers in China, India and elsewhere to crack down on inflation by raising interest rates - even at the expense of economic growth - have thrown a wrench into the economic and geopolitical forecasts that oil traders were betting on. Now they are swiftly backtracking. Thursday's decline of $9.44 a barrel in New York trading was the largest one-day drop since the recession two years ago.
With crude prices still elevated, however, consumers searching for relief from near-record gasoline costs and soaring food prices aren't likely to see much of a break unless oil continues to go down.
Thursday's drop in the price of oil powered the fourth-straight day of losses on the Toronto Stock Exchange.
"Around three or four months ago, there was a sense the U.S. economy was coming back, [that]China and India were still roaring ahead, and that the Middle East was going to collapse into civil war," said Todd Hirsch, a senior economist at ATB Financial in Calgary. "Now all of those hopes and fears have been subdued" and oil is, as a result, declining.
Indeed, worries that conflict in North Africa and the Middle East would put a serious kink in oil supplies had jacked up oil prices by about $20 per barrel, said Peter Tertzakian, chief energy economist at ARC Financial Corp.
However, while unrest in North Africa and the Middle East has not crushed oil production, the threat still looms, which means the price of oil will continue to be volatile, he said.
"The haircut on the price of oil - a commodity that is much more vital to society than cotton or silver - could be short-lived," Mr. Tertzakian said.
Sudden changes in the price of oil are often driven by psychology. Oil traders move in herds, jumping in when the price is rising, then spooked when their predictions prove false. This mentality, the two economists say, is to blame for oil's recent meltdown.
Oil's collapse dragged the S&P/TSX composite index to 13,455.38, down 155.94 points or 1.2 per cent, bringing the total loss to nearly 490 points this week. And it was part of much broader selloff in commodities, including gold prices, which fell about $24 an ounce, and silver, which has plummeted 29 per cent this week, just days after touching a record high.
The declines have overtaken positive news that greeted investors at the start of the week. The killing of Osama bin Laden was supposed to usher in a so-called peace dividend among global stocks. And it was hoped that the Conservative Party majority win on Monday would give a lift to Canadian oil sands producers.
The commodity selloff is driven by central bank policies, said Phil Flynn, senior energy analyst at PFGBEST, a U.S. trading and brokerage firm.
On Thursday, the European Central Bank held its key interest rate unchanged and signalled that future rate hikes were likely not in the cards, at least in the near term, marking an unexpected shift in monetary policy.
The move sent the U.S. dollar flying. The U.S. dollar index rose 1.5 per cent, its biggest one-day move in nearly seven months. Conversely, the Canadian dollar declined, falling to $1.03, down more than a cent. Since commodities are priced in U.S. dollars, they fell.
Earlier this week, India's central bank raised its key interest rate by half a percentage point, a bigger-than-expected hike that shows the country is getting tough on fighting inflation.
"There has been a gradual realization, which has been gaining attention over the past few days, that the emerging market economies are taking steps to slow growth," said Avery Shenfeld, chief economist at CIBC World Markets.
This is important, given that countries such as India and China have become massive consumers of key commodities as they modernize their economies and develop into manufacturing powerhouses.
In North America, low interest rates push speculative investors to make bold moves that would be tempered if lending rates were higher, said Darren Dansereau, a fund manager at QV Investors Inc. in Calgary. Speculators are able to borrow money on the cheap to make these bets without as much risk as when rates are more punishing.