The oil producing nations across the world are starting to get nervous as the price of oil is below $50 a barrel despite production cuts. There has been a large amount of drillers who are hedging future prices that allows them to receive profits at agreed levels even if the market drops.
Whilst oil production slows at the agreed rate of 1.8 million barrels a day you would expect the price to increase as stockpiles fall. However, there have been minimal reductions in the stockpile levels and a crash could be closer than you think.
This should be of concern to the Canadian Dollar as the currency is at the mercy of the oil price. Oil is Canada’s biggest export and the movements to the price of oil often directly show in the strength of the Loonie. If the price of oil was to continuously drop and oil producers can protect their profits it’s likely that there will be a long term reduction. If profits remain then exploration can continue, after last year where the barrel resided in the $30 region the CAD was 20% weaker against Sterling with the rate above 2.
Whilst there isn’t set to be a crisis just yet the existing deal between oil producing nations does expire soon. There is an expectation that the deal could be extended for another 6 months but all the nations would have to agree. Considering it took nearly a year to form the first deal any delay in discussions could start to have an effect on the price of a barrel.
The GBP/CAD exchange rate has been up and down over the last few weeks and this looks as though it could continue. I would not be surprised to see the rate move back towards the 1.70 region over the next few months as Sterling begins to settle.