Wednesday, 15 May 2013

Is Cheaper Crude Weakening the Canadian Dollar?

Ralph Shell, Excel Analyst

Is Cheaper Crude Weakening the Canadian Dollar? For the fifth day in a row, WTI (West Texas Intermediate) crude traded lower - under 93 for the June contract.  Granted, there is much more to the Canadian economy than energy, but it is the biggest source of export revenue.  The Alberta oil sands are estimated to be the third largest reserve of crude in the world.  Current production - around two million barrels a day - has been projected to go to 3.6 million barrels in ten years.  That number might be optimistic.

It is obvious, looking at a map, that the Alberta fields are well removed from consumption centers.  Consequently, this oil, classified as Western Canada Select, trades at a discount.  According to the IEA, Alberta's heavy oil traded at a discount to the WTI of $8.50 to $24.50 during 2012.  During the first quarter of 2013, the discount was as wide as $35/barrel.

The surge of production in the North Dakota and Alberta fields is taxing the transportation capability.  More pipeline capacity is needed to move this oil to market.  Remember, the oil from the Alberta sands is a costly venture.  Should global oil prices fall, the multinationals producing in Canada might be quick to reduce their production.  How much would production slow if the WTI sold off into the seventies?  The most recent manufacturing sales report released today showed petroleum and coal sales down 2.6% to $6.96B.

Without increased pipeline capacity, there is a risk that Canada's oil exports may slow.  The proposed Keystone pipeline, which would transport about 900K barrel per day south, has been obstructed by Obama and friends.  This, despite over 25,000 miles of pipeline already in the US, has been selected as the one not to build.

Last night's surprising election results in neighboring British Columbia might offer Alberta a glimmer of hope for the construction of a pipeline to the Pacific.  Despite trailing in the polls, the incumbent Christy Clark enjoyed a comeback win. 

Partly because of lower natural gas exploration and production in British Columbia, this territory has been running deficits.  Clark, perhaps because Moody's lowered the outlook for BC bonds, decided to pursue the development of liquid natural gas (LNG) export facility as part of her campaign.  This, of course would involve construction of a natural gas pipeline, plus the LNG plant.  These investments would run  perhaps, $10B.  Further, she said there are conditions whereby she would be willing to have BC host an oil pipeline and terminal; it sounds like a major one might be money.

The Canadian economy has been recovering better than Europe, but the perception is their recovery is falling behind that in the US.  In the futures market, specs got loaded up short, partially for that reason, and many have been run in.

Perhaps another reason for different fundamentals in the two currencies is the real estate markets.  While the US real estate market had a hard sell off, the Canadian market barely budged.  Now the US market is recovering, and the Canadian market is slowly retreating, down for nine consecutive months in Vancouver, for example.

Today, there was some US fundamental information which indicated the US economy is less than robust.  US PPI M/M was -0.7 and the US Empire Manufacturing Survey at -1.43 was also a poor number.

Click to Enlarge USDCAD H4 15 May 2013

The USD had gained to over 1.02 on the loonie, but those numbers stopped the market and the USD has since dropped to 1.0170.  It will be interesting to see how the market reacts to meaningful data about the US economy coming tomorrow.  At 01:30 Dublin time we get US Building Permits, US CPI and US Initial.  Stay tuned to the Forex Razor calendar to see the market impact.

My inclination is to trade the USDCAD from the long side.  Perhaps we will enter should the market settle back to the 1.0135.  And, of course, as always: mind your money.
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