Investors were caught by surpriseon Wednesday when the Bank of Canada announced that it was lowering its key interest rate. This weighed heavily on the Canadian dollar, which fell by close to 4% over the last week. While this may be good for Canadian companies exporting to the U.S., it also raises fuel prices across the country.
- The falling price of black gold has slowed economic growth in Canada and eroded the country's inflation outlook. Given this environment, the BoC has adopted a preventive approach. In its latest report, the BoC mentioned that WTI crude should sell for about $60/barrel for the next two years. Given its current price of $45.48/barrel, this means that the BoC expects prices to rally in the medium term.
- The collapse in oil prices is having a major impact on oil producing companies in North America as well as many OPEC member countries. There has been a series of announcements of job cuts and reduced investment spending, both in Canada and the United States. On the heels of job cuts at Canadian giant Suncor, the service businesses Baker Hughes and Schlumberger have announced 7,000 and 9,000 job cuts. Given the time lag between investment and production, it will take several months before the effects of recent cuts to North American production will be felt in the market. Last week the Iraqi oil minister mentioned that the price of oil had reached bottom and that a rebound can be expected.
- The drop in the value of the Canadian dollar, combined with the first signs that prices for crude are stabilizing, lead us to believe that the worst of this slump is now behind us and that sufficiently attractive conditions are now in place for companies with no hedges to begin taking action.
Emmanuel Tessier-Fleury