Canada Markets

A key OPEC meeting will be held on Thursday, where a decision will be announced whether production will be cut to support or boost the price of oil or whether the organization will agree to do nothing, while boosting its fortunes by increasing its market share in global markets. The implications are enormous for the industry and the global economy alike.

A small cut in production may or may not support current prices, while it may take a significant cut to see prices move higher. Should OPEC choose to do nothing, the CBC reports Monday that Brent crude, the global price of oil, could fall to $60 per barrel. West Texas Intermediate is currently trading at a $3.77/barrel discount to Brent crude, down from a high of $16.97/barrel discount reached in mid-November 2013 as seen on the continuous chart. Sixty-dollar Brent crude could mean even lower WTI.

The Wall Street Journal reported Monday that there are no hints of what will happen on Thursday, interesting timing as it coincides with the U.S. Thanksgiving. OPEC is under pressure from its high-cost members to cut production in order to bolster prices. Saudi Arabia's oil minister Ali al-Naimi downplayed the current global oversupply, stating to reporters: "For the last 20 years, you have been asking me questions. May I ask you a question, what should OPEC do?"

The attached monthly West Texas Intermediate continuous chart shows prices holding above support at $73.66/barrel, which represents the 50% retracement of the move from the December 2008 low to the May 2011 high of $114.83/mt. While noncommercial traders hold a bullish net-long position in WTI contracts, this position has declined in each of the past four months and could be set to fall this month based on final CFTC report for the month as seen on the third study. The lower study indicates futures spreads widening since September which indicates an increasingly bearish trend in commercial sentiment.

A breach of the $73.66/barrel support could result in a further slide to the 61.8% retracement level of $63.94, which is close to the May 2010 monthly low of $64.24/mt.

Implications resulting from a decision not to cut production could be significant. A lower price could be difficult for oil producers who could see price move well below breakeven levels. Canada's Provincial and federal governments could be caught with prices well below budgeted levels. Ethanol's price relationship with gasoline will be distorted, which could have implications for grain demand. A slide in oil could trigger a similar sell-off in a number of other commodities, including grains. The Canadian dollar could find itself under further pressure, which will have mixed impacts on both the Canadian economy along with the agriculture industry.

At the same time, lower energy prices could be viewed as positive for many industries, which would welcome lower fuel and oil prices.

It's interesting to note that a recent Bloomberg poll of economists found the results split down the middle in terms of what could happen Thursday.

Cliff Jamieson can be reached at cliff.jamieson@dtn.com

Follow Cliff Jamieson on Twitter @CliffJamieson

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