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We've been told by experts (including the Bank of Canada) that transportation bottlenecks in Canada's oil industry are the root cause of the cheapness and volatility that plague prices for Canadian crude. But recent trading suggests that a considerable dose of opportunistic speculation may have now taken over where the market's well-documented pipeline shortcomings have left off.
On Monday, the price discount for Western Canadian Select (WCS) crude relative to the North American benchmark West Texas intermediate grade narrowed by $3.50 (U.S.) a barrel, or more than 15 per cent, as the Canadian crude grade surged even as global oil prices fell. The supposed logic? U.S. refineries are ramping up production and refiners' oil inventories are dipping, suggesting a demand boost is in the cards.
None of this information was new on Monday; the most recent weekly U.S. refining and inventory data were five days old by then. News of upcoming refinery re-starts has been known for weeks. This same information has done absolutely nothing to help WTI crude prices in the past week.
Come on. These aren't the fundamentals talking.
The fact is, wild gyrations in the WCS discount spread have been a routine occurrence in the past couple of weeks, despite evidence that the factors that had allegedly been feeding its volatility have considerably improved. Oil storage capacity has been expanded, so that more oil is readily available to seamlessly move down pipelines as capacity allows. Rail shipments have surged, bypassing pipeline constraints to deliver Western Canadian crude to market. Oil production and exports have both risen strongly.
In short, the fundamentals point to less volatility, not more. The most plausible conclusion is that the speculators have discovered that there's money to be made in WCS's mood swings, and have put it into play.
Of course, speculation in the oil market is hardly a new thing. As commodity derivatives grew into a full-fledged asset class for large-scale investment portfolios over the past decade or so, the substantial role of speculators in those markets became accepted as part of the deal. It's near-impossible to say with any accuracy how much of the traded price of oil is fuelled by speculation, but it's a good bet it's a factor in the current market: The number of speculative long positions in New York Mercantile Exchange crude futures (i.e. contracts to buy oil that are held for purely investment purposes, rather than as commercial hedges by oil consumers and producers) are near the top of their historical range.
While all this elevates the trading noise in the day-to-day marketplace – complicating the lives of oil producers attempting to navigate the market – there may be a silver lining for Canada's oil patch. Perhaps the inherent volatility of Canadian crude prices that has been attributed to its dysfunctional fundamentals – which, in turn, has been identified as a discouraging factor for long-term capital investment – has been considerably overstated. Maybe once the speculators grow tired of the WCS trade and move on to the next opportunity, we'll see that the underlying fundamentals for Canadian oil are healthier than we've given them credit.
David Parkinson is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow him on Twitter at @parkinsonglobe.
David Parkinson