Oil prices are falling sharply – and taking the S&P/TSX Composite Index down with them.
Here’s what you need to know:
Why are oil prices falling?
Demand for oil fell during the summer because the world’s economy hasn’t been growing as quickly as expected. Meanwhile, there’s an oversupply because of increased oil production in the U.S. and Canada’s oil sands. Making matters worse, OPEC leaders met last week, and then decided to leave production levels unchanged at 30 million barrels per day. That sent prices sliding another 10 per cent.
Why does that pull down the value of the S&P/TSX Composite Index?
Oil and gas stocks account for a hefty 20 per cent of the S&P/TSX Composite Index – an index that includes share prices of the largest companies that trade on the Toronto Stock Exchange. That’s second only to financials, which make up just over one-third, or 36 per cent, of the index. (Bank stocks got hammered last week because of disappointing fourth-quarter results. The combined weight of falling financials and energy stocks is pulling down the index.)
How far have prices fallen?
Crude oil for January delivery fell to $63.37 on the New York Mercantile Exchange on Monday. That’s down nearly four per cent from the previous close. Crude oil prices have fallen nearly 40 per cent since mid-summer, landing at a five-year low, according to The Canadian Press.
How much lower could oil prices go?
As with any stock or commodity price, that’s a matter of debate. Analyst Adam Longson predicts that the global crude benchmark, Brent, could drop as low as $43 (U.S.) per barrel during the second quarter of next year, before prices start to recover. Overall, he predicts that oil prices could average around $70 (U.S.) per barrel for 2015, The Canadian Press reports.
Bloomberg reports hedge funds are betting that the oil-price crash is close to ending, with speculators holding long positions in the commodity again.
- With files from Toronto Star wire services