The price of crude oil fell 7 percent last weekend, dropping below $55 per barrel after falling for 12 consecutive days. This period marked oil's steepest decline in more than three years and, while prices have since rebounded, the sentiment is still bearish.

What's most alarming is the rapid shift in the oil outlook. Just a month ago, we marked the highest price for crude in four years, and much of the world was fretting about prices hitting $100 per barrel. Now, a sharp turnaround has occurred and markets are looking at a $50 per barrel target.

Crude Oil since 36 months ago: A sudden change in sentiment since early October


Why the sudden change, and what impact does it have on the global financial markets?

From the supply side, top oil producers such as Russia and Saudi Arabia ramped up supply after the Iranian sanctions. The U.S. also increased fracking supply around the same time. But the Iranian sanctions did not turn out to be as restrictive as they initially seemed: The U.S. granted waivers that allowed eight countries to continue to import Iranian oil, which eased concerns about supply.

While it looked like the supply side was a moving variable, according to Bloomberg economists the drop in oil prices is largely due to weaker global demand. Rising trade tensions clouding the economic outlook, a higher U.S. dollar and reduced demand from emerging market countries for oil are the primary drivers behind this trend.

But structural changes are also taking place. The profits that result from processing crude oil into vehicle fuel have plunged to their lowest levels in three years. Chinese car sales have been slumping and electric vehicles are gaining in popularity.

In the foreign exchange market, we are seeing a divergence between countries that import oil versus export oil. For instance, oil exporters have seen their currencies drop. The Colombian peso, Norwegian krone, and even the usually stable Saudi riyal have all seen large downward pressures.

Meanwhile, oil importers such as India, Turkey and Brazil have seen their currencies strengthen to two-month highs, though with further interest rate tightening expected from the U.S. Federal Reserve, this may not be a one-way trend going forward.

Our View: This sudden "crude oil awakening" and shift in the outlook for heavy crude oil is very interesting. While the long-term consequences may not be obvious, this could be the beginning of move toward less reliance on the supply of oil produced by OPEC. In the short-term, reduced global demand and volatile stock prices may reduce pressure on the Fed's future tightening path. It will be interesting to see if we're at the start of a shift in the geopolitical landscape.

If we can help you with any Foreign Exchange needs, please email or call (800) 447 4133.

The information in this report was compiled by the staff at City National Bank from data and sources believed to be reliable but City National Bank makes no representation as to the accuracy or completeness of the information. The opinions expressed, together with any estimate or projection given, constitute the judgment of the author as of the date of the report. City National Bank has no obligation to update, modify or amend this report or to otherwise notify a reader in the event any information stated, opinion expressed, matter discussed, estimate or projection changes or is determined to be inaccurate. This report is intended to be a source of general information. It is not to be construed as an offer, or solicitation of an offer, to buy or sell any financial instrument. It should not be relied upon as specific investment advice directed to the reader’s specific investment objectives. Any financial instrument discussed in this report may not be suitable for the reader. Each reader must make his or her own investment decision, using an independent advisor if prudent, based on his or her own investment objective and financial situation. Prices and availability of financial instruments are subject to change without notice. Financial instruments denominated in a foreign currency are subject to exchange rate risk in addition to the risk of the investment. City National Bank (and its clients or associated persons) may, at times, engage in transactions in a manner inconsistent with this report and, with respect to particular securities and financial instruments discussed, may buy from or sell to clients or others on a principal basis. Past performance is not necessarily an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.