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OPEC Pushes the Canadian Dollar Higher

by, David Frank, Economist

The GBP/CAD Forex market appeared to shrug off the oil rally after OPEC reached a deal to cut oil production by 1.2 million barrels per day. The USD/CAD Forex market also shrugged the deal off.

When the deal crossed the wires, yesterday afternoon, crude oil rocketed by over eight percent and normally we would have expected the Canadian Dollar to have responded robustly. Usually the Loonie tracks oil prices. However, bother the USD/CAD and GBP/CAD Forex markets were borderline in the red all day.

What is of more importance for the Canadian Dollar is the massive rally with the US Dollar which is tracked by the British Pound and rising yield rates in both the United Kingdom and the United States seem to be at fault. These factors helped to neutralize the Canadian currency. However the CAD is stronger elsewhere and could still find some broad base strength as the price of oil is moving higher.

Oil ministers of the 14 member cartel more formally known as the Organization of Petroleum Exporting Countries or OPEC concluded their meeting in Vienna with an announcement to cap oil supply. This was the cartel’s first production cut since 2008 and will see them reduce production by 1.2 million barrels per day to 32.5 million barrels per day. This was less than what market watchers wanted, at 1.4 million barrel reduction, but countries like Russia have also agreed to cut production by 300,000 barrels per day.

The cut was agreed unanimously by all cartel members and even got the support of Russia. We are still waiting to see if other non-OPEC members will get onboard. The biggest oil producer, in the cartel, took the larges cut by agreeing to pair production by some 486,000 barrels per day.

After the deal was announced the contract price of Brent WTI Crude jumped to nearly $50 per barrel. This was not the robust response that should have happened. The reaction has been stronger on front end of the Brent crude curve thus narrowing the costs by only two percent on the one year horizon. In other words, this cut in production is a mere drop in the bucket as there is a global supply glut still in place and soft demand for oil.

There is also a lack of investor confidence in the longevity of this OPEC deal or any expectation that it will curtail US shale producers. This would only partially offset the output cut. However, the price of oil should go up in 2017. The upswing in the price of oil should be moderate as we enter into 2017.

Fallout should be minimal as well as oil prices should reach on average of $52-53 per barrel next year. For the economy in the United States, that is a sweet spot as it is a high enough price to spur investment into shale oil production. However, not large enough to reduce consumer purchasing power. The biggest losers from this OPEC deal will be countries with lower economic
growth. Countries like Japan and Europe and other oil importing regions of the world with slow growth economies will be effected more as time passes.

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