Banks urge cau­tion as Poloz mulls rate move

Oil woes to spill be­yond Al­berta, say CIBC, BMO

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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.


Fi­nance Min­is­ter Bill Morneau is ex­pected to an­nounce in­cen­tives for the pri­vate sec­tor later this month.


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