TORONTO—Scotiabank’s Commodity Price Index dropped 4.8 per cent month-over-month in November (-6.1 per cent year-over-year) and will end 2014 in a deflationary mode, according to a new forecast from Scotiabank.
“Significant capacity expansion and the defence of market share by major oil and iron ore producers—against a backdrop of lacklustre world economic growth—account for the softness at the end of the year,” said Patricia Mohr, vice-president of economics and commodity market specialist at Scotiabank.
“The decision by Saudi Arabia not to reduce output to shore up international oil prices, but instead to allow prices to drop to levels curbing U.S. shale development appears to be having a negative impact on confidence in a wide variety of other commodity as well as equity markets.
Mohr says that while lower oil prices will boost U.S. and global consumer purchasing power and spending, when oil prices fall to abnormally low levels (broaching average production costs) the overall positive impact on GDP growth is not as clear, and may in fact be destabilizing in some oil-producing countries. The oil sector and related industries account for more than 11 per cent of U.S. business investment.
West Texas Intermediate (WTI) oil prices below US$60 are heavily over-sold, as prices have fallen below average mid-cycle breakeven costs across the U.S. and Canada. A sharp, fairly rapid reduction in drilling activity is already underway, which will bring supply back into balance with demand.
Mohr says that an extended period of lower oil prices less than US$80-per-barrel is expected over the next several years, the year-over-year rebound in prices by late 2015 will likely be “…in the double-digits.”
Other highlights from the report include: