West Texas crude oil dipped below $50 per barrel Jan. 5 for the first time since April 2009.
Crude has fallen by about half since last summer, which is contributing to a weaker Canadian dollar.
The Bank of Canada valued the loonie at about US84.8 cents at the start of this week, which is down about 10 percent since the summer.
The weak loonie should support Canadian agricultural exports and on-farm grain prices, while weak oil should put downward pressure on the cost of farm inputs such as diesel and fertilizer.
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On the other hand, weaker oil prices can put downward pressure on corn and oilseeds because of the biofuel connection, but they have had little effect so far.
The market will also watch to see if the strong American dollar hurts U.S. grain exports.
Analysts don’t expect a quick turn around in the loonie or crude oil prices.
In their December economic and foreign exchange outlooks, the major Canadian banks said they expect the loonie will continue to fall against the American dollar, which should rise against most global currencies in 2015.
Canadian economic growth as measured by gross domestic product is expected to climb to more than two percent in 2015 but still lag behind the United States, which is likely to see growth topping three percent.
The oil price decline has mixed effects on both economies, with consumers benefiting but producers feeling pain.
Most expect that the net effect in Canada will be negative because of the relatively larger role oil and gas production plays in the Canadian economy. Energy now accounts for one quarter of all exports and more than a quarter of business capital spending.
The fall in crude will hurt U.S. production regions such as North Dakota and Texas, but the U.S. should be a net beneficiary of lower oil values.
With the economy clipping along and unemployment falling, most analysts expect the U.S. Federal Reserve will increase interest rates this year., which would add support for the U.S. dollar.
The Bank of Canada is less clear about the need to increase rates.
CIBC thinks the Fed will start hiking rates in spring but that the Bank of Canada won’t move until late in the year, when repeated U.S. rate hikes should have brought the overnight benchmark to the one percent level that Canada already has.
Several banks noted that the Bank of Canada won’t raise interest rates until increased exports and business capital expenditures replace consumer spending and housing as the major economic drivers.
The December foreign exchange outlook from Scotiabank is for a Canadian dollar at 85 cents by the end of the 2015, while RBC Economics is at 84 to 85 cents late in the year and BMO Capital Markets at 84 cents in the fourth quarter.
The CIBC sees the loonie falling as low as 81 cents in the third quarter and 82 in the fourth quarter.
As for oil prices, they should be weak until production in high cost regions is curtailed or global economic growth improves and stimulates demand.
The Organization of Petroleum Exporting Countries has decided over the objections of some members to maintain production in a strategy of short-term pain for long-term gain.
Saudi Arabia, the dominant player in OPEC, wants to maintain its market share.
It hopes low prices will force a sharp cutback in American shale oil production and Canadian oilsands. High prices had allowed the boom in U.S. oil production over the past couple of years, thanks to fracking and horizontal drilling.
This new production had little impact initially because Iraq was still recovering from the war and Libyan production was off following the civil war there.
However, both countries are again producing oil, adding to the global surplus.
Meanwhile, global demand is off because of the stagnating European economy and slowing growth in China.
Scotiabank noted that a lot of the new oil production in the U.S. and Canada has a break-even cost in the low $60s (West Texas Intermediate) per barrel.
With prices now $10 below that level, Scotiabank sees a “fairly rapid reduction in drilling activity in the United States and Western Canada.”
Wells in shale formations have a short lifespan, and new drilling is constantly needed because production declines without it.
Production should also decline in Russia and other regions for similar reasons, and Scotiabank sees crude climbing back to around $70 by late this year. However, weak prices of less than $80 could be around for several years.
