Oil sinks as economic woes trump geopolitics
TSX, oilsands hurt by tumbling prices
Oil prices are tumbling as concerns grow that demand will ease if Europe falls into deep recession and China’s economy slows too much.
U.S. benchmark crude fell 72 cents, or 0.8 per cent, to $84.10 (U.S.) at Friday’s close — that’s a 15 per cent this year.
But analysts say it’s too soon to know if oil prices will continue a downward slide, noting they have been kept high in part due to geopolitical fears. Now those fears have been usurped by economic concerns.
Earl Sweet, a senior economist at BMO Capital Markets, said for much of 2010, global oil markets were mostly stable.
Before the Arab spring began, there was a relatively good balance between supply and demand. When markets are balanced, the normal prices for oil would be in the range of $80 to $90 a barrel, he said.
But oil prices later skyrocketed to more than $110 a barrel over concerns about a disruption of supply, notably in Iran, Libya and Nigeria.
The latest drop in oil prices can be linked to growing concerns about the European debt crisis, especially in Greece, as well as suggestions Spain will soon ask its eurozone partners to help bail out its troubled banks.
China’s economy is another worry as its central bank cut its benchmark one-year deposit rate by 0.25 percentage points to stimulate the economy. China’s economy has grown at an unbelievable annual pace of 10 per cent, but economists predict it will likely fall to 8 per cent soon, with some fearing it could drop to 6 per cent.
That would pack a big punch to commodities demand, hurting Canada in particular. Even in the aftermath of the 2008 financial crisis, growth never fell that much.
“We’ve morphed where geopolitical concerns were the primary driver to where now economics is trumping the geopolitical,” Sweet said.
He doesn’t anticipate a continuing slide “unless our forecast is wrong — China doesn’t achieve a soft landing, and Europe doesn’t do what’s necessary to hold things together and avoid an implosion.”
That doesn’t mean oil prices might not fall below $80 for a few weeks, but Sweet doesn’t believe it will stay down for a prolonged period, given economic forecasts and the typical intervention of the Organization of Petroleum Exporting Countries (OPEC). Ministers of OPEC are scheduled to meet next week in Vienna to discuss output.
Canada’s economy is closely tied to oil prices, and certainly some oilsand companies would be concerned if prices stay low, especially those working on costlier projects to mine or produce oil.
“They’re not happy about this, obviously, because it’s really affecting their cash flows quite substantially — and that will affect their ability to invest and develop their projects,” Sweet said. “It’s hurting for sure, but it’s not disastrous.”