ROB Insight is a premium commentary product offering rapid analysis of business and economic news, corporate strategy and policy, published throughout the business day. Visit the ROB Insight homepage for analysis available only to subscribers.
Economic data and a sharp increase in U.S. oil inventories sent WTI Crude price skittering lower by three per cent Wednesday.
Weaker-than-expected manufacturing reports from China and the U.S. had commodity prices lower at market open. The Department of Energy's report on inventories – showing an seven million barrel weekly inventory build, six times higher than estimates – accelerated the selling in the energy sector.
U.S. crude inventories are now higher than at any point since records began in 1982. The trend will cause some major anxiety in Alberta – the more oil the Americans have in storage, the less they will need to import.
WTI crude prices tend to move in the reverse direction of inventory levels (see chart) reflecting the basic effects of supply and demand.
For Canadians, there is a more interesting pattern developing: the faster the DOE inventory build, the bigger the differential between West Canada Select and WTI crude prices. Canadian oil prices – the most important determinant of revenue generation for domestic oil producers – fall further than WTI when inventories are rising.
Thankfully, despite all the talk about U.S. energy independence, there is no evidence that U.S. demand for Canadian oil is declining. But if U.S. oil production continues to grow at a 20 per cent annual pace, and crude inventories continue to reach new highs, we are not far away from a time when domestic producers will have to find new global customers.
Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here to read more of his Insights, and follow Scott on Twitter at @SBarlow_ROB.
Scott Barlow