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Oil Bust Drags Canadian Dollar to Historic Lows [Chart]

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Oil Bust Drags Canadian Dollar to Historic Lows [Chart]

Oil Bust Drags Canadian Dollar to Historic Lows [Chart]

“Lower for longer” means loonie could hit US$0.59 by end of 2016

The Chart of the Week is a weekly Visual Capitalist feature on Fridays.

The continued pressure on the oil sector is wreaking havoc on the Canadian dollar.

This morning, the Loonie continued its freefall by losing another -1.1% , bringing the current exchange-rate to US$0.69. It’s the first time the Canadian dollar has traded below US$0.70 in 13 years, but the damage could be even worse.

David Doyle, a top forecaster for Macquarie Capital Markets, lowered his projection for 2016 to have the loonie finish at US$0.59. This would eclipse the all-time low for Canadian dollar, which was set on Jan 21, 2002, at just below US$0.62.

“Lower for Longer”

In this week’s chart, we show the well-established relationship between the Canadian dollar and the price of oil. Both prices have moved in tandem since 2000, and they’ve also both nosedived since the collapse of oil prices in mid-2014.

In fact, it may not surprise you to know that there are traders out there who use the Canadian dollar as a proxy for oil prices. If they think oil is going lower, they’ll sell Canadian dollars if it offers them the right kind of market exposure.

Oil is now trading at its lowest price since 2004, and many analysts believe that the pressure on prices will continue. Pundits are talking $20 oil and even $10 oil. While it’s very possible neither of those thresholds are reached, what is known is that low oil prices mean the Canadian dollar will continue to be under duress.

However, what are the specifics of this relationship? Canada is surely an economy that has a heavier reliance on raw materials, but it is no Saudi Arabia, right?

The Relationship Between Oil and the Canadian Dollar

The key to this relationship is based on two major principles.

Firstly, while Canada is a major producer of oil, it also exports the majority of this production to the United States. In 2014, Canada produced 4.4 million barrels of oil and equivalents per day, and it exported 3.4 million of this to the United States. Billions of US dollars are changing hands between American buyers and Canadian producers.

Oil prices are mostly traded in US dollars, which means that as the price drops, there are less US dollars being paid out to Canadian producers. This means producers are exchanging fewer US dollars for the Canadian dollars they need to pay wages and production costs. This drops the amount of “demand” for Canadian dollars, which affects the price of the currency.

Lastly, because oil is denominated in US dollars, the above effect gets further amplified by any other changes to the USD/CAD relationship. For example, while Canada has been loosening its monetary policy, the United States has been trying to do the opposite. This, along with other factors, has led to strength in the US dollar.

A strong dollar means cheaper oil. Cheaper oil means lower demand for Canadian dollars.

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Energy

The World’s Biggest Oil Producers in 2023

Just three countries accounted for 40% of global oil production last year.

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Donut chart showing the biggest oil producers by country in 2023.

The World’s Biggest Oil Producers in 2023

This was originally posted on Elements. Sign up to the free mailing list to get beautiful visualizations on natural resource megatrends in your email.

Despite efforts to decarbonize the global economy, oil still remains one of the world’s most important resources. It’s also produced by a fairly limited group of countries, which can be a source of economic and political leverage.

This graphic illustrates global crude oil production in 2023, measured in million barrels per day, sourced from the U.S. Energy Information Administration (EIA).

Three Countries Account for 40% of Global Oil Production

In 2023, the United States, Russia, and Saudi Arabia collectively contributed 32.7 million barrels per day to global oil production.

Oil Production 2023Million barrels per day
🇺🇸 U.S.12.9
🇷🇺 Russia10.1
🇸🇦 Saudi Arabia9.7
🇨🇦 Canada4.6
🇮🇶 Iraq4.3
🇨🇳 China4.2
🇮🇷 Iran3.6
🇧🇷 Brazil3.4
🇦🇪 UAE3.4
🇰🇼 Kuwait2.7
🌍 Other22.8

These three nations have consistently dominated oil production since 1971. The leading position, however, has alternated among them over the past five decades.

In contrast, the combined production of the next three largest producers—Canada, Iraq, and China—reached 13.1 million barrels per day in 2023, just surpassing the production of the United States alone.

In the near term, no country is likely to surpass the record production achieved by the U.S. in 2023, as no other producer has ever reached a daily capacity of 13.0 million barrels. Recently, Saudi Arabia’s state-owned Saudi Aramco scrapped plans to increase production capacity to 13.0 million barrels per day by 2027.

In 2024, analysts forecast that the U.S. will maintain its position as the top oil producer. In fact, according to Macquarie Group, U.S. oil production is expected to achieve a record pace of about 14 million barrels per day by the end of the year.

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