Oil skidded to its lowest level in more than 11 years despite heightening tension in the Middle East, extending a dismal run for Canadian stocks and the loonie.
Ceaseless pressure on global oil prices is rippling through the economy, along with fears of a major slowdown in China, where previously booming demand for commodities had meant big rewards for Canada.
But on Wednesday, Canada’s benchmark heavy crude price was hit hard again, falling below $20 (U.S.) a barrel for the first time since record-keeping for that grade began seven years ago. It fell in concert with global crude prices such as the international benchmark Brent, which sank to its lowest since 2004.
That helped pull the loonie down half a cent to less than 71 cents. The Canadian currency has been hit by the oil shock, poor prospects for domestic economic growth and the different paths on interest rates being taken by the U.S. Federal Reserve Board and the Bank of Canada.
The Canadian dollar, which sank 16 per cent last year, has now reached depths last seen in August, 2003, and further weakening is possible. That spells more worries for importers as well as travellers heading to the United States.
Meanwhile, the S&P/TSX composite index skidded 193 points to 12,726.80 in its third straight session of losses, pulled lower by energy shares such as Encana Corp. and Paramount Resources Ltd.
It all combines for a gloomy and frantic start to 2016, on the heels of a year in which the country’s economic prospects darkened along with commodity prices.
Much of the economic damage is in the West, especially Alberta, where the energy industry has slashed billions of dollars of spending and thousands of jobs to deal with the collapse in both oil and gas prices.
Brent crude fell $2.19 to $34.23 a barrel, as more countries nations sided with Saudi Arabia amid the kingdom’s growing tensions with Iran. Saudi Arabia cut ties with its fellow OPEC member after two of its embassies in Iran were attacked in response to the execution of 47 people, including a prominent Shia cleric, on terrorism charges.
Before the current downturn, now well into its second year, crude prices would spike on any worsening relations in the Middle East on fears that supplies would be cut off, sending consuming countries scrambling to make up the difference.
Now, the big worry is that the strains between the two members of the Organization of the Petroleum Exporting Countries, which have its largest reserves, will only make it more unlikely that the cartel will agree to rein in production.
“That might not have mattered if we got some help from some other areas, like positive economic data out of China or Europe or wherever,” said Phil Flynn, an analyst at Price Futures Group in Chicago.
“This is coming at a time when the market’s oversupplied. [Traders] are concerned about economic growth and right now they think that this tension is just going to mean more supply on the market, not less.”
Even before the Saudi-Iran tensions, markets were faltering on the prospect of the end to export sanctions on Iran in the coming weeks, and the country’s aim of shipping as much as one million barrels a day.
Not even data showing an unexpected drop in U.S. inventories could arrest the fall in oil prices. The U.S. Energy Information Administration said inventories fell by 5.1 million barrels, when analysts had expected a rise of 439,000 barrels, according to Reuters. Gasoline inventories, however, surged by the highest volume in more than two decades.
Western Canada Select, a blend of heavy crude and bitumen from the oil sands, sold for $14.50 a barrel less than U.S. benchmark West Texas intermediate on Wednesday, according to oil broker Net Energy Inc., implying a value of just $19.97 a barrel for the Canadian supply. That was the lowest since 2008, according to Bloomberg.
At that price, no producers are making money, said Martin King, an analyst at FirstEnergy Capital Corp. Operating expenses alone are $10 a barrel for a steam-driven oil sands project and $35 for a mining development, Mr. King said.
Investors took note. The Toronto Stock Exchange’s energy group, which includes shares of integrated oil companies, producers and oil-field service providers, slid by nearly 4 per cent.Report Typo/Error