Our most recent FCC economic update focuses on the connections between oil and Canadian agriculture. We argued that a decline in oil prices will generally benefit agricultural producers. A related question is whether oil prices are likely to fall some more.
The drivers behind the fall in oil prices seem to make consensus: 1) surging oil production in Libya and the U.S.; and 2) weaker demand because of a generalized slowdown of the world economy. Supply expanded at a time when demand softened, and all three popular benchmarks for oil prices fell in the last three months.
There is a diversity of opinions in the market as to whether oil prices are going to continue falling.
Analysts have always underestimated the actual growth in U.S. light oil production over the last few years. U.S. supply has really grown. But lower prices will really test the competitiveness of U.S. oil producers. Some believe that traditional oil producing countries like Saudi Arabia will cut supply to support higher prices. In reality, they have few incentives to cut back production because it would help new emerging suppliers such as the U.S. So prices are not likely to move up soon because of lower volumes of oil.
The world economy is slowing down. China just reported an annual GDP growth rate of 7.3 percent for the third quarter of 2014. This is the lowest figure in 5 years. A more pronounced slowdown could lead to future declines in oil prices. But the “outlook remains for stronger momentum in the global economy” according to the latest monetary policy report of the Bank of Canada .
So in summary: it is hard to see a scenario in which prices climb back short-term to the levels observed four months ago. We may be in a period of softer prices until demand picks up again and matches the pace of the expected increase in supply.
J.P. Gervais, Chief ag economist