The recent drop in the price of Canadian oil will have a limited economic effect, a Desjardins report says.
The price for Western Canadian Select (WCS) dropped this week to US$20 per barrel. The price decline of 63.8% so far this year is similar to the price drop of 64.5% in 2014, Desjardins says.
Desjardins is forecasting this latest decline will only have a limited impact on the Canadian economy, though. Investment in the oil extraction sector only represents 14% of total non-residential capital spending, compared to 28% in 2014, when “the oil industry was running full throttle and was one of the main drivers of Canada’s economic growth,” the report says.
While in 2014, the Bank of Canada lowered interest rates twice after the price of oil dropped, Desjardins expects the central bank to raise interest rates on Oct. 24.
Business investment in other sectors is growing, the report says, and the easing of trade tensions with the U.S. adds to the positive economic outlook.
“Ongoing extremely low prices for Canadian oil could represent, nevertheless, one more reason for the BoC to continue to act with caution,” the report says.
Pipeline capacity problems
While world oil prices have risen recently to four-year highs due to concerns including possible U.S. sanctions on Iran, Canadian oil prices have gone in the opposite direction as new production floods pipelines and U.S. demand drops temporarily due to fall refinery maintenance outages.
The difference last week between (WCS) prices and the New York benchmark West Texas Intermediate (WTI) was more than US$52 per barrel. According to Net Energy Group, the difference between WCS and WTI for November delivery has averaged US$45.50 per barrel this month. The difference between Edmonton Sweet and WTI has been about US$27.
“Canada is facing an unprecedented epic pipeline problem,” said Jon Morrison, analyst at CIBC, in a report. “And while we have known that this issue has been on the horizon for years, the pressure in the system is building and it’s set to remain ugly for some time.”
Western Canada will remain short of pipeline capacity even if Enbridge Inc.’s Line 3 replacement pipeline is completed by 2020, thus adding 370,000 barrels per day of capacity, CIBC notes.
The short-term situation will improve but not enough to allow growth in activity if crude-by-rail exports double as expected to a record 450,000 barrels per day by the end of this year, the report says.