What you need to know about the oil market

Oil is arguably the most global of all commodities and has significant connections to agricultural markets.

Oil prices impact the value of the Canadian dollar, and thus profit margins for crop and livestock sectors. They’re also related to the price of inputs.

Consider the following observations from the U.S. Energy Information Administration’s (EIA) recent Monthly Energy Review:

  • World crude oil production is still climbing – mainly as the result of higher oil production from Iraq, Saudi Arabia and the U.S. Both year-to-date numbers and year-over-year numbers (both as of August 31) are higher in 2015 than in 2014. Canadian production is also up: the year-to-date monthly average of daily production was 3,678 barrels in 2015, a 3.1% increase over 2014.

  • World petroleum consumption is trending up, mostly because of an increase in the United States. Consumption is slightly down in most other Organization for Economic Co-operation and Development countries.

The demand for oil in emerging markets is murkier. Take China for example. Some reports suggest Chinese consumers bought more gas as the drop in crude oil prices was passed on. Yet, there are also reports of stocks building up in China, throwing into question whether the consumption increase is sustainable.

How does oil production impact Canadian farm income?

What’s the key takeaway from the EIA’s Monthly Energy Review? All U.S. petroleum development indicators are pointing down.

This means future oil production is bound to decrease. Eventually this should bring oil inventories back to historical levels. Right now, stocks in the U.S. are about 35% higher than their five year average. And if inventories shrink, prices should start climbing.

When will we see oil prices move up? It could be quite some time before oil breaks the $US 50 range and stays above that level for a sustained period of time. Only then will we see a different impact of oil prices on the economic environment of agricultural producers.

In the meantime, enjoy the benefits from a low Canadian dollar. This support from the loonie is especially apparent when compared to the recent projection from the United States Department of Agriculture: a 38% drop in U.S. farm income for 2015. Canadian farm income projections are nowhere near that decline. 

But always remember, you can’t count on a low Canadian dollar forever. Raise productivity through innovation and smart investments – those are your keys to a successful future.

J.P. Gervais, Chief Agricultural Economist