National Post (National Edition)
Banks urge caution as Poloz mulls rate move
Oil woes to spill beyond Alberta, say CIBC, BMO
TORONTO • The wider Canadian economy will soon start feeling the pain being endured by Alberta oil producers for the past few months, and that should give the Bank of Canada reason to pause before plotting its next move, according to two of the country’s major banks.
Most Canadian oil producers put up a strong show in the third quarter, but warned of production cuts and lower spending as their barrels are fetching roughly a third of the global prices due to pipeline shortages.
“More immediately, production is being curtailed in Q4 in an effort to alleviate pressure on the differential from pipeline and rail bottlenecks,” Avery Shenfeld, chief economist at CIBC Capital Markets wrote in a note to clients Friday. “There will therefore be negative real GDP impacts beginning in the current quarter and extending into next year, as well as hits to the nominal trade and current account balance.”
Canadian heavy oil benchmark Western Canada Select was trading at a US$42 discount to West Texas Intermediate on Friday, according to Bloomberg data.
Canadian Natural Resources Ltd. plans to reduce drilling activity and cut production due to pipeline constraints.
“These factors will play a prominent role in 2019 and future capital allocation decisions,” the company said at its third-quarter earnings announcement.
Adding to the industry’s woes, a judge in Montana ordered TransCanada Corp. on Thursday to halt construction on Keystone XL pipeline — a vital conduit that would connect Alberta to the Gulf Coast and would alleviate price pressures on Canadian barrels.
Global oil markets are also in a state of flux, having lost 22 per cent in less than a month that’s plunged it into bear market territory. U.S. crude was trading at US$60.04 Friday, after dropping under US$60 a barrel to its lowest in eight months.
Douglas Porter, BMO Capital Markets’ chief economist, argued in a note Friday that policy-makers have been too calm about the softness in WCS, chiding Governor Stephen Poloz for suggesting in a speech earlier this week that the recent “especially large” discount was due to maintenance and will be temporary.
“Heading into a wave of fall fiscal updates, most notably from Ottawa on November 21, the deep dive in oil is the one new factor that could throw the proverbial cat among the revenue pigeons.” Porter noted in his report on Friday, referring to Finance Minister Bill Morneau’s announcement later in November expected to provide incentives to the private sector.
Similarly, Sheffield says that while Bank of Canada’s October Monetary Policy Report was sanguine on the country’s brewing oil crisis, “it will be hard to ignore when Poloz’s team announces its December rate decision.”
The Bank of Canada did mention in its monetary policy report that the drop in Western Canada Select prices was weighing on Canada’s terms of trade.
“Firms are continuing to expand capacity in response to strong domestic and foreign demand, except in the oil and gas sector, where transportation constraints are an ongoing challenge,” the Bank said in its report.
Oil accounted for nearly two-thirds of the growth in exports in the third quarter, primarily due to higher prices, according to Statistics Canada.
But the sector, which is the country’s largest export product and accounts for a third of business capital spending, is expected to be a drag on GDP growth in the next few quarters.
“As much as the Bank of Canada wants to demonstrate it can hike on a rate decision date that’s not accompanied by an MPR, December won’t be the time to do so with this story in the spotlight,” wrote Shenfeld.
Porter concedes, however, that it’s tough to argue against the Bank slowly lifting rates amid the lowest jobless rate in 40 years and core inflation hovering right around target.
“Having said all that, and even recognizing that the Bank won’t be swayed by market volatility, an extended period of weakness in oil prices is one new development that could indeed stay its tightening hand,” Porter said.
“Let’s just say that the odds on a hike over the next two meetings (i.e., by January 9) are lower than the market’s guess of 90 per cent.”
There is a 75 per cent chance the Bank of Canada will maintain rates at its December 5 meeting, according to a Bloomberg forecast.