Canada Markets

The importance of exports to Canada's economy is no secret. A random fact shared by Export Development Canada on Twitter this morning suggested that exports account for more than 60% of the country's GDP while are also responsible for one in five jobs in the country.

Meanwhile, land-locked commodities, from grain to oil, continues to create challenges for both producers and the economy as a whole. Canadians, as a whole, should have a vested interest in the attempts to build oil pipelines east, west and south in order to meet global markets. Meanwhile, grain producers in particular would also benefit from slowing the oil-by-rail trend that would result as a means of increasing meeting future transportation needs due to increased grain production.

The attached chart outlines the current challenges faced by Canada's oil industry. The upper study indicates the spread between the ICE Brent crude future, which represents the world price of oil, and the NYMEX West Texas Intermediate contract. The Brent/WTI weekly spread reached an almost seven-month low at $4.78/barrel the week of April 7 (Brent over WTI, before making a move higher and breaking a downtrend line which began in late November 2013.) Since this widening of the spread began, the spread has retraced nearly 33% of the distance from the November high to the April low at $8.80/barrel.

This move comes as a result of diverging fundamentals between the United States and the world market. Global markets are adding risk premiums due to the Ukraine/Russia conflict and the threats of supply disruptions that may result, along with supply issues in Nigeria.

At the same time, the ban on the U.S. export of oil has stocks building in that country due to rapidly growing domestic production, with this week's government energy data released in the U.S. reporting oil stocks at 397.7 million barrels, the largest supply in records dating back to 1982. This inventory level is suggested to be only 2.3% higher than year-ago levels, although the industry faces growing production along with weak demand.

Should the technicals influence this trade, a break above the $8.80/barrel spread could see a further widening of the spread to a test of $9.44/barrel, the 38.2% retracement of the downtrend seen from November through April.

The lower study indicates how the Canadian industry is further negatively influenced by the current divergence in markets. The spread shown is the difference between the West Texas Intermediate and Western Canadian Select heavy crude, which is trading at minus $18.60/barrel, or in other words, Canadian heavy crude is trading at an $18.60/barrel discount to WTI.

After rallying from a discount or spread of minus $39.88 in November to a high of minus $18/barrel on the weekly chart, the spread retraced 33% of the move to test the minus $25.29 on two occasions in February, only to move back to a near test of the minus $18/barrel level in late March and April. The spread seems challenged at the minus $18/barrel level and has since weakened.

In other words, the Canadian industry not only faces the lost opportunity as the world market strengthens in relation to the North American market, but further weakness seen in the spread between Canadian oil and WTI further punishes the industry. Government officials often use the cost of $50 million per day or an annual $18 to $19 billion dollar impact to the economy to describe this situation. Some have gone so far as to describe this as an enormous transfer of wealth to U.S. refiners, and can only be overcome by meeting the infrastructure needs to diversify the markets Canada's product is sold into.

Cliff Jamieson can be reached at cliff.jamieson@dtn.com

Follow Cliff Jamieson on Twitter @CliffJamieson

(ES)

© Copyright 2014 DTN/The Progressive Farmer. All rights reserved.