Crude Oil under pressure

Trade crude oil with IG Bank

The decline in oil prices continues. After breaking through the level of 42 US $ per barrel of crude oil (WTI), the next support is the August-low at 37.75 USD per barrel. Should we also break through this level the price could head towards the lows we saw during the flash crash in 2008 at 33 US $ per barrel. As described in our last article "The Lost inflation" this does not bode well for the central banks. Further declining oil prices will put pressure on inflation which should increase the likelihood of an extension of current programs for quantitative easing.

What sounds positive for equity markets are no good news for the currencies of commodity countries, especially for Canada. After the rejection of the plans for the so-called Keystone XL project by US president Obama, Canada is facing headwind. The Keystone XL project was meant to connect the oilfields in Alberta with the refineries and the ports of the Golf of Mexico. This additional pipeline would have more than doubled the amount of oil carried to that region. The operational cost per Barrel carried would have decreased which in turn would have increased the profit margins. This would have been particularly important given current oil prices. The US Dollar continued its uptrend against the Canadian Dollar (USDCAD) in recent days. The next resistance is the level of 1.35 USDCAD. Should we break through this level and given a further decline in oil prices and further boosted speculation of a rate hike in the US, the level of 1.40 USDCAD could be targeted.

Once again it becomes clear how closely connected the global economy is. We need an economic stabilization of the emerging countries and China to halt the price decline of commodity prices. Coupled with the QE programs the desired inflation target of the central banks could be achieved. Only then we could speak of a beginning normalization of global economies and financial markets

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