Oil dives below $75 US a barrel on supply worries

Oil was plunging on world markets Thursday, diving below $75 for the first time in three years, as traders focused on rising production and lower global demand. The oil-sensitive Canadian dollar dropped by half a cent to below 88 cents US.

Brent crude, used to price half the world’s oil, fell below $80 US a barrel, the lowest it’s been since September of 2010. On Thursday, it closed down $3.41 US a barrel at $77.71.

In New York, the December crude contract also dropped steeply, down $2.97 cents at $74.21. The WTI contract has dropped 24.5 per cent since the beginning of the year.

Western Canada Select, the price received by many Canadian producers, was at $58.71, down by $3.41 at the close.

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Now that oil has crossed below the $75 barrier, some analysts say the rout will continue.

“Breaking $75 is not just a market move in my view but a dislocation in world economies,” said Mark Grant, an analyst with Southwest Securities.

“Many oil producing nations have budgets based upon $100/barrel oil. A 25 per cent discount to those projections will cause political turmoil and put tremendous political pressure on many social programs.You could see upheavals in Russia, the Middle East, Venezuela and a number of other oil producing countries,” he added.

Stocks on the TSX fell in concert with oil, with the energy sector hard-hit by the news. The TSX closed down 77 points at  14,778.

The Canadian dollar is below 88 cents US at 87.88, a drop of nearly half a cent. 

Breaking $75 is not just a market move in my view but a dislocation in world economies- Market-watcher Mark Grant

A surge in U.S. shale oil production has raised U.S. domestic production to a 30-year high, resulting in a surplus of oil on the market.

Figures out of the U.S. Energy Information Administration on Thursday showed U.S. oil production rose above 9 million barrels a day in the week ended Nov. 7, the highest it's been since 1983.

The U.S. EIA said crude oil inventories in the U.S. were down by 1.7 million barrels to 378.5 million barrels last week, indicating the expanding economy is taking up supply.  But markets ignored that sign that lower fuel prices were helping the economy and focused on the gush of production coming on stream. 

As U.S. politicians prepare to vote on the Keystone pipeline, the EIA pointed today to the rapid increase in shipments of oil and petroleum products by rail.

Rail carloadings totalled 672,118 tank cars during January-October 2014, 13.4 per cent higher than the same period last year, according to the Association of American Railroads. 

Canada takes a hit

Falling oil prices are cutting into government revenues in Ottawa and Edmonton.

In his economic statement yesterday, Finance Minister Joe Oliver predicted a razor thin surplus and pointed to falling crude prices as a drag on the Canadian economy.

Cheaper crude could drain $500 million from Ottawa's bank account this year and $2.5 billion per year between 2015 to 2019, and cut Canada's nominal GDP by $3 billion in 2014 and $16 billion annually from 2015 to 2019, it predicts.

"It is a prudent projection, adjusted for the recent decline in oil prices," Oliver said.

The upside of lower oil prices is more money in consumer pockets as gas and home heating prices drop and better margins for businesses as transportation prices drop. That could lead to a boost in other areas of the economy, including exports to the U.S.

OPEC signals it won't cut back

Members of the Organization of Petroleum Exporting Countries meet Nov. 27 to determine whether they should cut back production to tighten supply and boost oil prices.

But Ali Al-Omair, the Kuwait oil minister, said Thursday that he does not anticipate members will agree to reduce production.

OPEC governments need oil to pay the bills. And they seem content to let prices fall, when their own costs of production are very low.

Instead, they want to pressure higher priced producers, including U.S. shale and Canadian oilsands, to cut back to deal with excess supply.

At the same time, world demand for oil is down because of slow economies in Europe and a slowing economy in China.

OPEC issued its Monthly Oil Market report, saying the average price paid for oil in October was $85.06 a barrel, down $10 from September. It also pointed to the narrowing spread between Brent crude and WTI, the oil contract traded in North America.

“The Brent-WTI spread has contracted further in October to average $3.70 barrel, the lowest difference in 15 months,” the November OPEC report said.