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Briefing highlights

  • The cost of the oil cuts
  • How far OPEC must go
  • Saving at the gas pump
  • Qatar to quit OPEC
  • Markets at a glance
  • What to expect on rates
  • What else to watch for
  • Nutrien sells stake in SQM

Notley’s cuts

Alberta Premier Rachel Notley’s oil production cuts will bite deep into Canada’s first-quarter economic growth, Bank of Montreal calculates.

So much so that gross domestic product will expand at an annual pace of just 0.7 per cent in the first three months of 2019, according to Benjamin Reitzes, BMO’s Canadian rates and macro strategist, and senior economist Robert Kavcic.

Absent the cuts unveiled by Ms. Notley late Sunday, growth would have been 2 per cent, meaning her order to restrict supply will cost Canada almost 1.5 percentage points.

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As The Globe and Mail’s Justin Giovannetti and Shawn McCarthy report, Ms. Notley took the extraordinary step of ordering companies to cut production by 8.7 per cent, or about 325,000 barrels a day, starting next year. That sparked a jump in the western Canadian oil benchmark and put a fire under the shares of some energy companies.

“We had already built in production cuts of about 120,000 barrels per day in Q4, which were already announced by various companies, so the full impact on Q1 should bite less than the full estimate,” Mr. Reitzes said in a separate report.

“Either way, it will put a serious dent in the GDP forecast to start 2019.”

BMO has now cut its Canadian growth forecast for 2019 to 1.8 per cent, or down 0.2 of a percentage point, while bumping up its 2020 projection by 0.1 of a percentage point to 1.7 per cent.

“The expected rebound in production later in the year should contain the full-year 2019 GDP impact and potentially lift 2020 slightly, depending on timing,” Mr. Reitzes and Mr. Kavcic said.

“Indeed, we currently assume that production comes back online through the rest of 2019 and cuts are expected to fully unwind by the end of the year.”

Alberta has been on a quest to boost prices and narrow the differential, starting with Ms. Notley’s plans to buy railcars to help get the province’s crude to market and climaxing with her order to cut supplies.

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That came after Finance Minister Joe Ceci’s fiscal update Firday, which forecast an average differential of US$29.25 in fiscal year 2018-19, wider than the US$22.40 projected in the last budget. It also forecast WTI will average US$64.

Alberta Finance Minister Joe Ceci and Premier Rachel Notley hug after delivering the budget in Edmonton, March 22, 2018


Mr. Ceci also pegged the 2018-19 deficit at $7.5-billion, narrower than what the budget forecast.

But, importantly, coming out of the last oil-induced recession, the province warned in the update of slower economic growth. This follows a solid run that, helped by a weaker Canadian dollar, saw manufacturing sales rise to at a four-year high and projections for oil production to gain 8.4 per cent over 2017-18.

But “moving forward, falling global oil prices and record highs for the Alberta light-heavy oil price differential have dampened growth expectations,” Alberta said in the update.

"Some Alberta oil producers have begun to shut in production and weaker corporate profits will impact the investment outlook next year," it added.

Given that, the province cut its economic growth projections, to 2.5 per cent this year and 2 per cent next, from budget estimates of 2.7 and 2.5 per cent.

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“The real question is how [fiscal year 2019-20] will look and, to be fair to the province, [Friday’s] report wasn’t exactly an ideal time to update the medium-term outlook given that a potential OPEC move is days away, and the differential is adjusting after some temporary shocks,” said Bank of Montreal senior economist Robert Kavcic.

“That said, if WTI, the differential and the loonie stay where they are today through FY19/20, the province could be looking at roughly $3-billion of downside from the outlook published in Budget 2019 (a $7.9-billion deficit),” he added in a report released before Ms. Notley’s announcement.

"Of course, a better base this fiscal year will help, and we don’t believe that today’s prices will stick."

BMO projected WTI will average US$63 a barrel in the 2019-20 fiscal year, or US$3 better than in the budget forecast. At the same time, a softer-than-expected Canadian dollar could “more or less” counter a wider-than-forecast differential, Mr. Kavcic said.

"If prices play out this way, the medium-term plan could hold up. Clearly, though, a lot rests on OPEC’s next move and the path of WTI into next spring."

As for Ms. Notley’s plan to increase oil-by-rail by 120,000 barrels a day, it’s “a step in the right direction, albeit one whose benefits are far out,” CIBC’s Ms. Pinto said.

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How deep OPEC must cut

Analysts expect OPEC and its oil allies to agree this week to a production cut of at least 1 million barrels a day.

But Joan Pinto believes they’ll have to go much further to balance the crude market and, in the process, help Ms. Notley rescue Alberta.

The cartel and other producers that agreed to a previous supply cap, known as OPEC+, meet Thursday and Friday amid expectations for a cut that would buoy the market but also amid pressure from U.S. President Donald Trump to hold prices down.

The producers, which include Russia, are expected to ignore Mr. Trump and reinstate supply cuts. Indeed, Russian President Vladimir Putin said on the weekend that he would continue to work with Saudi Arabia. That helped boost crude prices today.

But they’ll have to go well beyond one million barrels a day, to about 1.5 million barrels, if they hope to balance the market, said Ms. Pinto, associate, energy specialist at CIBC World Markets.

OPEC meets Thursday, followed by the wider group a day later.

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There's a lot to digest here, with so many factors at play.

First, Saudi Arabia has been the subject of global condemnation related to the murder of journalist Jamal Khashoggi. Then there’s the fact that the Trump administration granted several countries waivers from sanctions against Iran.

And, key to Alberta, there’s a huge gap between prices for Western Canada Select, or WCS, a blend of oil sands bitumen and heavy oil, and West Texas intermediate and Brent crude, the global benchmarks. That differential, while narrowing recently, costs Canada’s economy $80-million a day, the province says.

Which brings us back to Thursday's meeting.

"Yes, the Saudis had to pay the price for the Khashoggi scandal and ‘produce as much as you can’ was partly responsible for oil prices tumbling," Ms. Pinto said.

"A combination of unexpected Iran sanction waivers and booming U.S. supply were also to blame," she added in a report.

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"But the fact that the Saudis have already announced cuts of 500,000 barrels a day to December exports indicates that they’ve settled their dues and are once again taking charge of loose fundamentals."

There are challenges amid the scenarios, of course.

“The Saudis may like $70-80 oil to fund government spending, but the White House looks to keep pushing Saudi Arabia to keep oil prices low to keep pressure on Iran, with the Saudis on the back foot after the Khashoggi incident,” said Citigroup commodities strategist Eric Lee.

“Russia, too, is cool about cutting, given their significant output growth potential, and its tax system and floating ruble providing insulation from [U.S. dollar] oil prices. Putin has said $60 oil is ‘fine,’ but there are indications they may be willing to implement some small, gradual cuts, and even commit to future meetings to reassess market conditions.”

OPEC+ will “fall short” if it opts to cut just one million barrels a day, but slashing about 1.5 million will give the group “a realistic shot” at balancing the market, Ms. Pinto said in an interview.

Looked at another way, a decision for about 1.5 million barrels "is the tide that will lift all boats, WCS included."

On its own, the western Canadian benchmark hit “rock bottom” below US$13.50 a barrel in November, but ended the month above US$20, which Ms. Pinto said “aligns with our view that WCS is gradually turning a corner.” Now, of course, there’s Ms. Notley’s production cut, as well.

JPMorgan Chase analysts agreed with Ms. Pinto that a cut by OPEC+ of 1.5 million barrels is needed to stop prices from slumping even more.

“Our oil strategists expect OPEC+ to scale back production by around 1.2 million barrels a day from October, 2018, levels for the whole of 2019 and by 1.5 million barrels a day in [the first quarter of 2019] if they want to prevent oil prices from sliding further,” said JPMorgan’s John Normand, head of cross-asset fundamental strategy.

"They estimate production cuts of less than 1.2 million barrels a day are unlikely to be supportive of prices as a decisive and meaningful supply cut is the only way to also provide confidence to investors who remain skeptical of re-entering oil lengths."

Based on a cut of 1.5 million barrels, CIBC’s new forecasts put WTI at between US$55 and US$60 a barrel in the current fourth quarter, and US$60 to US$65 in the first quarter of next year. For WCS, the bank projected US$20 to US$25 in the fourth quarter, and US$25 to US$30 in the first.

It didn’t change its projected averages for 2019 and 2020, which would see WTI at US$68.75 and US$66.75, respectively.

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Saving at the pump

What many of us want to know is what we’ll be paying at the gas pump.

Obviously, we're not going to save if oil prices rise with what's expected from OPEC+ this week.

But we shouldn’t be hit too badly, either, as Ms. Pinto sees it.

"Gasoline prices have declined from the dual effect of lower oil prices and high gasoline inventories," she said. "Besides, the refined fuel market has had its own set of idiosyncratic factors this year."

Among other things such as American gasoline and diesel stocks, the U.S. oil grade has lightened, which means refiners get more out of refining. As well, North America is moving into a period of lower demand.

So “even if we get OPEC+ cuts and a subsequent lift to oil prices, corresponding gasoline price increases will be relatively contained,” Ms. Pinto said.

Markets at a glance

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What to watch for this week

The term no-brainer comes to mind as to whether the Bank of Canada raises its benchmark overnight rate again Wednesday or holds steady at 1.75 per cent.

Governor Stephen Poloz, senior deputy governor Carolyn Wilkins and their colleagues are expected to hold firm amid weaker economic readings and the slide in oil prices.

Bank of Canada senior deputy governor Carolyn Wilkins and governor Stephen Poloz

Adrian Wyld/The Canadian Press

After the central bank raised its key rate by one-quarter of a percentage point in October, markets had wondered whether the next hike would come in December or January.

But now, "it’s a forgone conclusion that two months of weak GDP and the face plant in oil prices preclude a rate hike," said CIBC chief economist Avery Shenfeld.

"Of more interest will be whether governor Poloz takes a cue from the [Federal Reserve] in walking back some of its earlier hawkish talk about what’s in store for the coming year," he added.

"Markets have come down to our view that only a further 50 basis points are bearable (with a terminal rate of 2.25 per cent), and will be looking for signals that the central bank’s thinking is drifting that way."

While some of the troubles with western Canadian oil prices was sparked by temporary refinery closures, it will take time to work off the inventories, said economists at Royal Bank of Canada. And there’s weakness in global crude markets, regardless.

"The potential downside risk from lower oil prices will likely reinforce the Bank of Canada’s approach of raising the overnight rate very gradually," RBC said.

"The announced shutdown of the Oshawa car plant similarly presents a downside risk to growth that will keep tightening by the Bank of Canada gradual, though the impact may be more of a 2020 rather than 2019 event," they added, referring to General Motors Co.'s recent decision to shutter the once-mighty car assembly operation east of Toronto.

The central bank is, nonetheless, still likely to point to further rate hikes down the road.

What else to watch for over the next few days:


We'll get a sense of the state of the global manufacturing sector as purchasing managers index readings pour in.

"We've continued to see sustained weakness in this sector with Japanese manufacturing hitting a two-year low last week, while the latest Germany and France flash numbers also showing similar weakness for the month of November, with France only 0.7 points away from outright stagnation," said CMC Markets chief analyst Michael Hewson, referring to the fact that 50 is the PMI mark that separates contraction from expansion.

"If this weakness is confirmed in this week’s numbers, it really calls into question expectations about the policy path of central bank withdrawal of monetary stimulus, or quantitative tightening that has been the hallmark of this year’s price action, particularly with respect to European Central Bank monetary policy."


BMO rolls out fourth-quarter results, following rivals that reported last week.

Australia's central bank is expected to hold steady on its benchmark rate and "signal that the first hike is still some way off," Capital Economics said.

Watch South Africa, too, as, according to Capital Economics, third-quarter economic growth numbers are expected to herald an end to the country's recession.


It's central bank day: Not only is the Bank of Canada on tap, Fed chair Jerome Powell also speaks to Washington's Joint Economic Committee committee.

Federal Reserve chair Jerome Powell


Canadian Western Bank, Laurentian Bank of Canada and Roots Corp. also report quarterly results.


Bombardier Inc. holds its investor day in New York after a somewhat volatile period.

“We expect the company to provide more transparency on its 2019-2020 targets (and possibly beyond) and maintain the high level of confidence it has demonstrated in its recent conference presentations,” said Citigroup analyst Manish Somaiya.

“In our view, the credit markets are very supportive of the current management team, though we would be the first to acknowledge that waiting one additional year to 2020 for free cash flow is a disappointment.”

Given the focus on U.S. trade policy, today’s numbers on both sides of the border should also be interesting.

Economists expect Statistics Canada to report that the country's trade deficit widened in October to about $1-billion from September's $400-million.

"Oil prices only started to plunge in October, so the trade file is expected to see just a modest impact in this report," said Benjamin Reitzes, BMO's Canadian rates and macro strategist.

"With oil prices plunging further in November, expect a further widening into year-end," he added.

The U.S. report, in turn, is forecast to show a wider shortfall of about US$55-billion.

Also on tap is Mr. Poloz again, speaking to a business group in Toronto.


As BMO's Mr. Reitzes put it, today brings the spin of the "employment roulette wheel."

Keeping with that analogy, Statistics Canada’s monthly jobs report is always a crapshoot, with extreme volatility.

So keep your poker face: Analysts expect the report to show November job gains of anywhere from 5,000 to 25,000, with unemployment holding at 5.8 per cent or possibly dipping to 5.7 per cent.

"The employment roulette wheel managed to print a reasonable gain in October, following four consecutive big moves," said Mr. Reitzes, who expects to see net job increases of 15,000.

"Looking beyond the headline volatility, the yearly trend in job growth has slowed consistently through the course of the year."

Observers expect the U.S. report to show November gains of up to about 200,000 jobs, and unemployment at 3.7 per cent.

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