The Canadian and U.S. stock markets are off to terrible starts, continuing the negative sentiment from 2015. In North America, oil prices are plummeting and hitting the Canadian economy hard. In fact, worsening oil prices are hitting beyond the oil patch, dragging the sentiment of investors, consumers, and businesses.
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Canadian Oil Already at $10.00
Crude oil is extremely important to the Canadian economy and accounts for a notable amount of Canadian exports. Take the floor out of oil prices and Canada could quite easily slip back into a recession in 2016.
While most investors pay attention to the price of West Texas Intermediate (WTI)—a light grade of crude oil that is commonly used as the benchmark for oil pricing in the U.S.—here in Canada, we look at the price of bitumen. West Texas Intermediate is described as being light because of its low density. Canadian bitumen on the other hand is thick and tarry.
WTI has been losing ground since the Organization of the Petroleum Exporting Countries (OPEC) announced it was not going to cut its production, thus flooding the weak global economy with oil. At the same time, producers in North America continue to pull oil from the ground to stay afloat, thus saturating the market with even more oil.
In a supply-and-demand economy, oil prices have been gutted. WTI prices have tumbled over the last two years from around $100.00 per barrel to $20.00 per barrel.1 In Canada, prices of bitumen went down from $80 less than two years ago to $8.35 in mid-January. All of this will put additional pressure on Canadian bitumen and on the stock market
Low Oil Prices Dampens Mood of Investors
Low oil prices impact the entire Canadian economy, the Canadian dollar, and the stock market. They also negatively impact the two biggest economic drivers in Canada: consumers and businesses. If the economy stalls, businesses hire fewer employees and consumers spend less money.
Investors are less optimistic. After three years of double digit gains, the S&P 500 fell 0.7% in 2015. The negative momentum has carried into 2016, where the index is down 6.7%. The Dow Jones Industrial Average is also down more than 6.0% since the beginning of 2016; the worst start ever for the index. Since hitting a high in May, the Dow is down more than 10.0%.2
The commodity-rich TSX is following in step: it’s down roughly 6.0% since the beginning of the year and down more than 22% since September 2014. The deteriorating economic environment is stretching the Canadian economy and investor sentiment.
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- Vamburkar, M., “Crude at $10 is already a reality for Canadian oilsands producers,” Financial Post web site, January 14, 2016; https://business.financialpost.com/news/energy/crude-at-10-is-already-a-reality-for-canadian-oilsands-producers?__lsa=0715-cbea.
- Spittler, J., “This is the Worst Start Ever for U.S. Stocks,” Casey Daily Dispatch, January 8, 2016; https://www.caseyresearch.com/articles/this-is-the-worst-start-ever-for-us-stocks.
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