Canadian dollar falls below 74 cents as oil slips below $38

The Canadian dollar today dropped to its lowest level compared with the U.S. dollar since June 2004, as a fresh low for oil pushed the loonie deeper.

The dollar was changing hands down almost an eighth of a cent on Monday to 73.99 cents US around midday on Monday.That’s the first time the loonie has been below 74 cents US since June 2004.

The reason for the weakness was a new round of bad news for oil, which tends to drag Canada’s currency up or down in a closer correlation than any other single factor.

Oil lost another $2.22 US before noon Monday, with a barrel of WTI trading at $37.75, setting a new low for the year and hitting its lowest level since 2009. Prior to Monday, oil’s lowest close this year came on Aug. 24 at $38.24 a barrel.

In February 2009, during the depths of a global recession, the price of a barrel of oil bottomed out at $33.98 a barrel.

OPEC abandons production cap

Oil went south after OPEC said this weekend it would abandon the soft cap of 30 million barrels a day that the oil cartel has more or less stuck to since 2012. The group is currently pumping out about 31.5 million barrels a day, and OPEC president Emmanuel Ibe Kachikwu told reporters over the weekend that the group would set aside any talk of a production cap until at least its next group meeting, currently scheduled for June.

OPEC has more or less successfully managed the oil market for decades by capping the amount that it allows to enter the market. Although its influence has been diminished by concerted efforts in non-OPEC nations such as the U.S. and Canada to pump out more oil, OPEC still controls about a third of the market.

It’s believed that the cartel was willing to see oil prices crater in an attempt to drive U.S. shale producers out of business, because the latter have much higher production costs and can’t stay profitable for long in a cheap oil environment.

But the U.S. shale industry has proved far more resilient than first thought, as American oil companies so far haven’t balked or moved to cut their own production significantly.

OPEC’s announcement on Monday suggests the oil market is in a race to the bottom that looks set to continue.

“No one in the energy patch is willing to support the price [of oil] and if they aren’t willing, the price will keep dropping,” Mizuho Securities chief economist Steven Ricchiuto said. “The whole world is facing excess supply as the global economy slows.”

For now, OPEC seems comfortable to ride out the standoff, with a high-ranking official within the group saying the cartel sees not need to handcuff itself if other oil players don’t do the same.

The non-OPEC oil market “doesn’t have any ceiling,” Adel Abdul Mahdi, Iraq’s oil minister, told reporters in Vienna on Friday. “Americans don’t have any ceiling. Russians don’t have any ceiling. Why should OPEC have a ceiling?”

Oil’s swoon was also bad news for Canada’s main stock index, as the S&P/TSX composite index shed more than 300 points to 13,051 in the afternoon.