The ongoing decline in the price of oil is at the forefront of concerns affecting the financial markets today, acting as a drag on risk appetite and contributing to broad falls in commodity prices and the value of the stock market.
By Peter Martin
Tuesday, January 13, 2015
US light crude oil futures had slid more than 4% on the day by early afternoon in New York, falling to $46.30 a barrel. Though the commodity has more than halved since last summer, hit by high supply as global demand wavers, analysts at Goldman Sachs have lowered their forecasts for 2015, projecting $39 for six-months' time and $65 for 12-months, and suggest that only a slowdown in the US shale market in the second half of the year will curtail production enough to balance up supply with demand. Their reports said: 'To keep all capital sidelined and curtail investment in shale until the market has re-balanced, we believe prices need to stay lower for longer. The search for a new equilibrium in oil markets continues.' OPEC has resisted recent pressure to reduce output, while US production has surged in recent years thanks to the shale oil boom.
Exxon and Chevron, the two big oil companies in the Dow Jones, have both struggled today as a result, Exxon falling 2.03%, while Chevron dropped 1.86% and that played a significant part in stocks indices reversing their earlier gains on Wall Street. By early afternoon in New York, the Dow Jones was off by 116 points or 0.65%, while the S&P 500 Index dropped 14.6 points or 0.71% to 2030.3.
Canadian dollar weakens
In the forex market, the US dollar made strong gains against its Canadian counterpart, as the weakness in oil bodes poorly for the oil-export-dependent Canadian economy and after the Bank of Canada published its quarterly outlook survey, which showed falling inflation expectations. The central bank wrote in its report for the fourth quarter of 2014 that 'inflation expectations declined, with a majority of businesses anticipating total CPI inflation over the next two years to be in the bottom half of the Bank’s 1 to 3 % inflation-control range. The recent decline in oil prices was most often cited as the driver of weaker expectations.'
The Bank of Canada meets next week to decide on monetary policy, with an announcement due on Wednesday January 21. Based on this lowering of inflation expectations, there is reason to expect the central bank to maintain its slightly dovish stance. USD/CAD rose 0.70% to 119.50.
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