Oil’s Slick Descent
Oil prices have been under serious pressure since last summer. Between June 2014 and the end of October, oil prices fell roughly 23% to $80.00 per barrel on the heels of increased supply and a weakening global economy.
Oil prices faced even further pressure in November, when the Organization of the Petroleum Exporting Countries (OPEC) said it would not reduce its output. With the world awash in oil, prices fell to around $45.00 per barrel. Currently trading near $53.00 per barrel, oil prices have fallen around 50% since June.
How long will oil prices stay low? For the most part, oil prices are, like all commodities, priced according to supply and demand. And right now, there isn’t a whole lot of demand.
According to the International Monetary Fund (IMF), global growth in 2015 will be just 3.5% and 3.7%. More specifically, the U.S., the world’s biggest economy, will grow 3.6% this year and 3.3% in 2016. However, that’s about the only bright spot.
China, the world’s second-largest economy, is predicting the slowest growth rate in almost a quarter of a century and the eurozone, the world’s largest economic region, will expand just 1.2% in 2015 and 1.4% in 2016. In addition, Japan’s economy will “grow” 0.6% this year, while Russia is headed for a prolonged recession.
Those are not the kind of supply-and-demand metrics investors look for.
Canada’s Reliance on Oil
While Canada is one of the richest, most diverse economies in the world, it relies a lot on oil and gas. In fact, oil extraction accounts for roughly 3.0% of Canada’s total economic output, while crude oil accounts for about 14% of exports.
Slumping oil prices cannot help but hurt the country’s economy. However, low oil prices are a tale of two regions, with oil-rich provinces like Alberta and Saskatchewan being hit hard by declining oil prices. Since the summer, Alberta’s provincial revenues have plunged 17%; this has led to an expected budget deficit exceeding $7.0 billion.
Once considered impossible, Alberta is projected to slip into a mild recession this year. On the other hand, manufacturing provinces like Ontario and Quebec will benefit from lower oil prices.
Alberta’s economy is expected to retrace -0.3% in 2015 after reporting 4.1% growth in 2014. Growth in Saskatchewan will outperform Alberta, but only marginally, advancing just 0.8% this year after one percent in 2014.
Energy-rich Newfoundland and Labrador could contract even more this year by -1.3% and by one percent in 2016.
Thanks to a progressing U.S. economy and improving exports as a result of a weak Canadian dollar, Central Canada will experience growth. In Ontario, the economy is expected to grow 2.8% this year, up from 2.1% in 2014, and 2.8% in 2016. After growing just 1.8% in 2014, Quebec’s economy will advance 2.4% this year and 2.6% in 2016, while British Columbia will continue to advance in the mid-two-percent range.
Overall, the Canadian economy is projected to climb around 1.9% in 2015, down from 2.4% last year, and climb 2.5% in 2016.
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Even though low oil prices have been a shock to the Canadian economy, the Bank of Canada believes there is room for growth. A strong U.S. recovery and increased business investment should help with job creation, but again, chances are good this optimism is going to be regional.
But it is this divergence that will create interesting investing opportunities with stocks, commodities, and forex trading
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“Global Growth Revised Down, Despite Cheaper Oil, Faster U.S. Growth,” International Monetary Fund web site, January 20, 2015; https://www.imf.org/external/pubs/ft/survey/so/2015/NEW012015A.htm.
Giovannetti, J., “Next budget will include 9 per cent spending cut: Alberta Finance Minister,” The Globe and Mail
, February 11, 2015; https://www.theglobeandmail.com/news/alberta/nine-per-cent-spending-cut-coming-in-next-budget-alberta-finance-minister/article22936222/.
Isfeld, G., “Alberta will sink into recession this year, as provincial fortunes turn amid oil’s collapse, CIBC predicts,” Financial Post
, February 17, 2015; https://business.financialpost.com/2015/02/17/alberta-will-sink-into-recession-this-year-as-growth-slows-to-worst-in-country-next-to-newfoundland-cibc-predicts/.