Friday , May 7 2021

The 'drip-drip-drip' toll of the oil calamity on Canada's economy

Briefing highlights

  • Oil's economic toll
  • GM to close Oshawa plant
  • Markets at a glance
  • Read our annual Board Games report
  • What to expect in GDP report
  • Canadian bank results on tap
  • Trump to meet Xi at G20

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The crunch in the Canadian oil market is taking a "drip-drip-drip" toll on the economy, with the threat of even deep trouble.

Already, oil patch producers are pulling back and economists are cutting their forecasts for economic growth in Alberta, whose fortunes, of course, affect the country.

At this point, many are pinning their hopes on a early December meeting of OPEC producers and their allies to agree a supply cap. Never mind that President Donald Trump is pushing for lower prices, and backing Saudi Arabia in other areas, the group is still expected to agree to production cuts.

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Oil prices regained some ground today after Friday's drop, but Brent crude remained below US $ 60 a barrel, while West Texas intermediate, the US. benchmark was just above US $ 51.

While global oil prices have plunged, much of the focus is on Western Canada Select, or WCS, a blend of oil and bitumen oil that has suffered an exceptional discount for Brent and WTI.

"The longer the extreme lows persist for Canadian oil prices, the greater the economic damage to Alberta, and thus the national economy," said Douglas Porter, chief economist at Montreal Bank.

"The received wisdom is that WCS will mount a comeback in the coming months, but meanwhile we will keep our growth forecasts on a drip-drip-drip basis until that recovery shows up in the real world," he added.

Indeed, last week BMO cut its forecast for economic growth in Alberta to 1.7 percent from 2.1 percent in a new projection, "that's probably about a point lower than the oil prices have not gone into the tank in the past two months. Porter said.

Toronto-Dominion Bank economist Omar Abdelrahman and senior economist Brian DePratto calculated production cuts so far will trim half a percentage point from fourth-quarter economic growth, but Canada will regain that as the WCS discount narrows next year.

That would mean only a "muted impact" on economic expansion next year, albeit "slightly more pronounced" in Alberta, with a modest hit to Saskatchewan. Production cuts are expected to shave up to half a percentage point from the fourth quarter growth in Canada, and 0.1 per cent of what would otherwise have been projected in the first quarter.

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Alberta's growth alone could be hit to the tune of 0.2 to 0.3 of a percentage point throughout 2019.

But look out if it does not improve.

"If current pricing holds, the impact on real activity, incomes, and government revenues would quickly mount," Mr. Abdelrahman and Mr. DePratto said in a report.

"In that instance, Alberta's economy would be hard-hit and national Canadian growth could be cut by as much as 0.5 percent of a percentage point relative to our current baseline path," they added.

"Meanwhile, producers have been resorting to less-than-ideal measures in response to this. Perhaps the most significant near-term support will come from producers' recently announced temporary production closures, estimated to now exceed 160,000 barrels per day for both November and December, with the purpose of gradually balancing the existing glut. "

They also have ramped up shipments by rail to record numbers to help get around pipeline constraint issues.

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WCS discounts "of this extreme magnitude" tend to last for no more than a few months, Mr. Abdelrahman and Mr. DePratto said, projecting the differential to WTI will narrow to between US $ 20 to US $ 25 over the next several quarters.

Obviously, the mess in the oil market is a threat to the outlook, said Stephen Brown, senior economist at Capital Economics.

"At $ 51 at the time of writing, WTI is dangerously close to dropping below the $ 50 level that we think would cause serious pain for the Canadian oil industry," he said in a report.

"Even if WTI remains just above $ 50, the drop in the Western Canadian Select to just $ 15 per barrel is consistent with declining production before the end of the year."

Earl Sweet, head of economic risk at BMO, believes the oil cartel and its allies, and group observers call OPEC +, will cut supply sufficiently to see a moderate boost in prices, and that WTI will average US $ 62 per barrel next year.

That's down from BMO's earlier projection of US $ 65 and barrel. And, as Mr. Sweet noted, it is well below the US $ 73 and barrel, based on an average of WTI, Brent and Dubai crude, that the International Monetary Fund calculates as the fiscal break-even level in Saudi Arabia.

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"In Canada, producers will continue to be heavily challenged by a very wide discount on global oil prices until the transport capacity of Alberta is increased. Sweet said, echoing the complaints of many observers about pipeline delays.

"As oil production in Alberta continues to grow, the seemingly interminable delays to projects targeting expanded pipeline capacity to United States (Keystone XL) and to the Pacific Coast (Trans Mountain) have caused local supplies to accumulate," he added, like the TD economists, he also expects the WCS differential to narrow next year, though remain high, as more oil is shipped by rail and Enbridge Inc. completes an overhaul of one of its pipes.

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Oshawa awaits GM announcement

Oshawa, Ont., A long-time home of General Motors in Canada, is on the road today as it awaits the auto maker's announcement that it's shutting its manufacturing plant.

As the Globe and Mail's Robert Fife and Eric Atkins report, GM is poised to announce a global restructuring that would, among other things, see Oshawa shut down.

GM told the offices of the prime minister and Ontario premier Sunday night.

The announcement from GM, which was kept afloat during the financial crisis with help from the US and Canadian governments, plans to unveil details at about 10 a.m. ET.

The operation employs about 2,500 workers.

Read more
  • Robert Fife and Eric Atkins: GM to shut down Oshawa plant in global restructuring

Markets at a glance

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Board Games 2018

See who's up and running in The Globe and Mail's annual ranking of corporate governance in Canada.

For the 17th consecutive year, The Globe's Report on Business has rated the work of boards of directors using a rigorous set of governance criteria designed to far surpass the mandatory rules of regulators.

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What to watch for this week

Define a symbiotic relationship: Canada's economy and its big banks.

Both are in the spotlight this week as Statistics Canada reports on third-quarter economic growth and major banks start posting quarterly results.

"Growth popped higher in the second quarter, but momentum has slowed since then," CIBC World Markets senior economist Royce Mendes said of what's expected in Friday's report on gross domestic product in the third quarter

"Household spending seems to be the pinch of higher interest rates," he added.

"Even the positive contribution of net trade will show up as a result of imports falling more than exports, rather than anything more constructive for the Canadian economy."

Analysts generally expect the report to show the economy expanded between July and September at an annual rate of between 1.8 and 2 percent, with September alone showing a slim gain of just 0.1 percent.

Friday's reading will feed into expectations of whether the Bank of Canada could raise its benchmark rate again in December or wait until January.

"The economy was looking for growth engines in Q3, as the one major source of support – net exports – came with a twist, since the improvement was driven by a drop in imports", said BMO's Mr. Porter.

"In other words, look for slim gains in consumer spending and business investment, and a flat performance for housing," he added.

Before that, however, the Bank of Nova Scotia kicks off its industry's fourth-quarter reporting season on Tuesday, followed later in the week by the Royal Bank of Canada, the Canadian Imperial Bank of Commerce and the Toronto-Dominion Bank.

The quarter will not be either hot nor cold, Barclays analyst John Aiken projected in his lookahead to the bank reports.

"But a steady, uneventful close to [fiscal year 2018] Heading into Q4, we believe the Canadian banks will deliver a solid close to the year, which should translate into mid-single-digit earnings growth for FY18, "Mr. Aiken said.

"Over all, we believe that the following trends will resonate in the quarter: positive margins; steady loan growth; normalizing but still benign credit quality; weaker investment banking fees and stabilizing trading revenues; [efficiency ratio] driven by a 'kitchen sink' Q4, but core operating leverage remaining positive; and more modest [foreign exchange] tailwind to the bottom line; and dividend hikes from BMO, NA, and LB, "he added, referring to the National Bank and Laurentian Bank.

Stock values ​​could benefit, according to Barclays analyst.

"While bank valuations have been caught in the broader downdraft market, we believe that there may be investor concerns about a domestic operating environment that remains challenged, underscored by slower growth growth and an economic cycle that is likely in the late innings. Aiken said.

"That said, we believe the banks' relatively defensive positioning, including steady mid-single-digit earnings growth, fairly diversified business to weather and slowdown, their historical 'flight to safety' trade, and a solid dividend yield of 4.3% compelling counterpoints to fend off the bears. "

Read more
  • David Berman: Analysts offer mixed outlook on Big Six quarterly results

What else to watch for this week:


It's Cyber ​​Monday. And it's probably a good thing that the economy and earnings calendar is rather light, so you do not need to divert from online shopping for too long.


Scotiabank and Alimentation Couche-Tard Inc. report quarterly results.

In the US, economists expect the latest reading of the S & P Case-Shiller home price index to show a rise of 0.3 percent in September from August, and 5.3 percent from a year earlier.


Not just banks, but I can, too. RBC posts its quarterly results, as CannaRoyalty Corp.

Jerome Powell, Federal Reserve chairman, when he speaks midday to the Economic Club of New York, will also be watching for nods and winks.

Federal Reserve chair Jerome Powell

Alexander Drago / Reuters

Brexit returns to the stage, with a Bank of England analysis and results of stress tests on British banks.

"UK banks have been in the spotlight due to recent sharp falls in their share prices," said Michael Hewson, CMC Markets chief analyst.

Britain and the EU have agreed to a divorce deal over the weekend, but Prime Minister Theresa May now has to get through her own Parliament.

"Fear of no deal has hurt the sector in the past few weeks, and these tests will be a valuable indicator as well as a policy for investors to reassure them that the UK banking sector will be able to ride out any number of Brexit scenarios. "

Read more
  • EU endorses Brexit deal and warns British opponents that there is no better offer available

Statistics Canada is expected to report that the country's current account deficit narrowed nicely in the third quarter, but watch what you read into that.

Economists project the deficit will come in at about $ 11.5-billion to $ 12-billion, and far cry from the second quarter's $ 15.9-billion.

"In nominal terms, exports have shown a healthy rise, though that was attributable to price increases rather than volumes, which were actually slightly lower during the period," said CIBC's Mr. Mendes.

"Nominal imports were roughly flat during the quarter because prices rose as real imports were down. Given the drop in real imports, narrowing current account deficit should not leave markets with a sense of optimism regarding domestic demand."

Watch, too, for quarterly results from TD and CIBC, and the minutes from the last Fed meeting.


In addition to Canada's GDP report, a lot is riding on a G20 summit in Buenos Aires, notably the expected party meeting between Donald Trump and Xi Jinping, who is in the midst of a trade war.

Presidents Donald Trump and Xi Jinping meet on the sidelines of the G20 summit in Hamburg, Germany, July 8, 2017

POOL / Reuters

"Expectations have slowly been dialed about a possible solution in the short term, with the prospect that tariffs could well increase at the beginning of the next year from the current 10 percent to an increased rate of 25 percent," said CMC's Mr. Hewson.

"While the deal expectations have been set to a low level, an agreement not to implement the proposed increased rate at the beginning of next year could be described as progress."

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