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Energy producers poised to ride rising tide

Canadian oil is selling at a discount to U.S. crude, but as of early 2013, that discount has shrunk.

Denny Thurston/Getty Images/iStockphoto

For the first time in a long time, everything is moving in the right direction for Canadian energy producers.

Yes, Canadian oil is still selling at a significant discount to U.S. crude thanks to issues getting the stuff to market. And yes, a glut of natural gas is still weighing on profit at producers.

But the discount is the smallest since October, and the underlying price of U.S. crude is even a touch stronger than it was five months ago. Natural gas prices surged last week to levels well beyond where they were last October. What's more, the Canadian dollar has significantly dropped since then, which will add to the realized price in local currency for both oil and gas, which are traded in U.S. dollars.

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And yet, even after a big surge at the end of last week, the TSX subindex of oil and gas producers is still shy of where it peaked the last time commodity prices were at this level.

In just three months, the discount on Canadian heavy oil relative to the U.S. benchmark has been halved. The discount reached a peak of $42.50 (U.S.) a barrel in December. That means that a barrel of Western Canada Select crude sold for that much less than a barrel of West Texas Intermediate. As of Friday, the discount was $20.

Natural gas for delivery in one month finished the week at $3.85. That's roughly where the commodity peaked in November before softening, and well ahead of the approximately $3.50 it fetched on average in October.

The currency amplifies that effect. Friday, one U.S. dollar bought $1.02 Canadian, whereas in mid-October a greenback bought 98 cents Canadian, roughly. That adds a 4-per-cent kicker to the price improvement.

Oil and gas stocks, as measured by the oil and gas exploration and production subindex of the TSX, are starting to reflect the better prices after a big move Friday. But history suggests there could be a bit more in store.

Step further back, and the last time this combination of prices – exchange rate, discount and gas price – cropped up was late 2011. (The stars don't quite line up, as West Texas Intermediate was then trading closer to $100. It finished Friday at $93.52.)

At that point, the oil and gas producers index was about 10-per-cent higher.

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(Boyd Erman is a Globe and Mail Reporter & Streetwise Columnist.)

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