The ripple effect of falling oil prices

Yesterday's OPEC meeting in Vienna was surprising to put it mildly.

Despite a flooded market, the OPEC countries agreed to a nine month extension on current outputs. As expected, oil fell below $51 a barrel after both U.S. crude oil and Brent had reached monthly highs in the lead up to the meeting.


That disappointed some investors, who had hoped that OPEC might reduce output even further to drain a global glut that has depressed markets for almost three years.

Brent crude oil dropped as much as $1.24 a barrel to a low of $52.72 before regaining some ground to trade 53 cents lower at $53.43 by 8:25 a.m. ET (1225 GMT). U.S. West Texas Intermediate (WTI) crude futures was 62 cents lower at $50.74, up from a session bottom of $50.08.

OPEC ministers are gathered in Vienna to decide how long to extend a deal with other major exporters, including Russia, to remove 1.8 million barrels a day from the market.

Politically, this could lead to further justification for the Trump administration's plans to sell off the US strategic oil reserves. "If oil is so cheap, why do we need so much in reserve?" Faulty logic, sure, but politicians rarely suffer for short term thinking, at least not immediately.

Less reported is the ripple effect on the currency markets that this is causing. Countries with strong commodity-based economies tend to see their currencies rise and fall in value with the value of oil.

Accordingly, AUD and CAD saw roughly equivalent percentage drops in their values overnight, while the NZD, which was primed to see a jump in value following upbeat growth forecasts from their government, saw only modest gains.

This highlights the risk associated with an economy that is highly reliant on the export of natural resources or the manufacturing sector that requires them.

There's been talk of making America's economy more reliant on manufacturing and development of natural resources. Despite the growing pains associated with transforming from a manufacturing-based economy to service-based one, the stability and predictability of the US economy is one of the key reasons foreign investors flock to it.


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