Since hitting a record high of $78.40 in the month of July, oil prices have fallen close to 26 percent.  Although the Canadian dollar has been late to react, we are finally seeing the currency sell-off as the value of its biggest export begins to fall.  With a global glut forming as stockpiles remain full on unused barrels from the summer, the price of crude has broken below $60 a barrel and the question now is, will it remain there.  OPEC has already expressed concern about the fall in crude prices, having even agreed to informal cuts to production, but with oil prices continuing to slide, the market does not seem to believe them. 

Oil Not Really Hurting OPEC Profits
Even though OPEC members have been kicking and screaming about the recent drop in oil they have made tremendous profits when crude shot up from $30 to $75.  For the record, crude oil was below $40 a barrel just a little over two years ago, which is about 60 percent lower than the current $59 market price.  OPECââ,¬â"¢s argument for cutting production now is to prevent a sharp slide back down to $40 when non-OPEC oil producers add 2 million barrels per day of production next year.  However the real reasons is more likely tied to the fact that the winter season is just a few months away and they want to see oil prices hover above $60 a barrel, which is what oil exporting countries view as a fair price, to ensure that they can squeeze as much profits possible in the generally energy intensive usage season. 

Why the Market Is Not Buying It
There has a lot of speculation as to why oil prices have fallen so far so quickly.  Hedge fund liquidation (Amaranth for example) is said to have played a major role, but many people also believed that oil prices have been driven down ahead of the election season in the US.   Given that we are still a month away from the elections, oil prices may continue to remain low to boost the confidence of US consumers.  Secondly, global stockpiles have also been rising as demand for the commodity has slackened since hitting a record price in the middle of the summer.  This should keep supplies plentiful going into the winter season.  The mere subtraction of 1 million barrels by  OPEC a day is unlikely to dent the already building glut of global oil. 

Also there are many traders who believe that OPEC countries have agreed to the informal quota but may not even abide by them. Why would countries unified by a commodity attempt to stray from the status quo?  The answer is simple, market share.  With oil now the center of focus, OPEC countries have more of an incentive to break from the quota if it means that their individual market share will be increased.  The focus comes at a time when certain countries, such as Saudi Arabia, have increased investment in production capacity in order to supply foreign trade partners.  With a decrease in supply, the money already laid down would have been for nothing.  For this reason, the OPEC nations and the market continue to keep attuned to the Saudi response.  However, it may be one that may not be very welcomed by leaders.  Even subsequent to the release this week, Saudi officials have promised to keep the taps open for Europe and Asia, past November 1st, meeting predetermined quantities. 

But There Must Be a Bottom
Taking all of this into consideration, however, OPEC members are likely to establish some sort of bottom in the market as economies such as Iran and Venezuela remain dependant on higher oil prices to fuel social developments.  This could be anywhere between $50 or $55 a barrel.  Previously, with OPEC rhetoric emerging over the $60 a barrel mark, the overall market was speculating on the $55-$50 a barrel figure as the price serves as the average price per barrel throughout 2004-2005, a technical support.  Even more so, with the global forum obviously able to handle $70 barrel oil, OPEC leaders will be more than satisfied as consumers will likely consider $50 a barrel a fair price in the market.  This fair price, still at a historical high, will additionally continue to bolster further growth and create profits for the oil exporters without rocking the trade boat too much.

CAD/JPY and USD/CAD Key Plays
With oil prices at a very important turning point and the market closely eyeing OPEC, the Canadian dollar will be the currency to watch since the country owns the worldââ,¬â"¢s second largest oil reserves.  USD/CAD has just broken out of resistance levels with CAD/JPY  finding short term support.  More weakness will be dependent upon whether oil can break the $55 a barrel mark.  If we begin to fluctuate back above $60, the Canadian dollar could recuperate some of its recent losses.

Richard Lee is a Currency Strategist at FXCM.