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Briefing highlights

  • U.S. now ‘Wal-Mart of the oil market’
  • It’s also the first ‘quintuple threat’
  • Markets at a glance
  • Canadian dollar above 81 cents
  • ECB holds steady on policy
  • Retail sales rise for third month
  • Rogers swings to quarterly profit
  • Fiat Chrysler lowers part of outlook
  • What else to watch for today

The oil market's 'quintuple threat'

Unimaginable as this may have seemed not that long ago, particularly to a big-box retailer like Canada, America has become "the Wal-Mart of the oil market."

Not only that, says Michael Tran, the U.S. is effectively the "first quintuple threat" the market has ever seen.

"While oil-producing nations were struggling, with many hanging on for survival, the U.S. has, over recent years, undergone a complete transformation and emerged with an entirely revamped standing in the global oil market," the RBC Capital Markets commodity strategist said in a new report, citing recent suggestions by the International Energy Agency that America is poised to eclipse Saudi Arabia in crude output this year and will soon take on Russia as the biggest producer in the world.

"The U.S. is the Wal-Mart of the oil market," Mr. Tran added.

"You need it? They sell it, and often at discounts to global competitors."

He cited five points behind the U.S. transformation: "Elastic" production, integrated trading, diversity of crude quality, huge storage ability and the world's "largest concentrated refining hub."

Over all, this is a key development because, as Mr. Tran put it, those five points "have completely altered previously assumed historical rules of thumb pertaining to the global oil trade and, to a degree, even dampened the impact of short-term supply outages." And it comes as crude is coming out of a three-year slump.

It's not only that America has those five things going in its favour, it's also the fact that other competitors may be able to boast some of them, but not all of them, he added in an interview.

"The U.S. shale oil phenomenon has structurally rewritten how we think about the global oil trade, both domestically and on a global basis," Mr. Tran said.

"The U.S. has unintentionally become the world's swing oil trading hub, a true quintuple threat never before witnessed."

By that, he didn't mean a threat to oil prices, but rather to those historical rules of thumb. Think of it as upsetting what we saw as the status quo.

His five factors:

1. Cheap, fast production: "The world has never encountered a built-in, rapid response mechanism like the elasticity of U.S. shale production."

2. Capacity for imports and exports: "No country compares to the sheer scale at which the U.S. both imports and exports oil. The infrastructure is unmatched by peers."

3. Crude quality diversity: "Clearly, the U.S. is blessed with light, sweet shale, but it also serves as a one-stop shop offering a wide-ranging cocktail of crudes ranging from offshore sours to re-exporting Canadian heavy barrels. The diverse offering can cater to almost any global refinery."

4. Storage: "The Gulf Coast houses one of the biggest discretionary story hubs. This is a boon for regional storage operators who can benefit from opportunities from both a term structure perspective and pricing dislocations between the U.S. and global crudes."

5: Refining hub: "The Gulf Coast is one of the world's largest concentrated refining hubs. The close proximity to refiner-challenged LATAM regions makes the U.S. the de facto custodian refinery for large parts of the Western Hemisphere."

American export trade is still young as the transformation is recent.

Indeed, it occurred in a short timespan, and here's why:

American demand for gasoline and distillate have actually declined over 10 years, as refining capacity rose.

"During that period, Europe faced a series of refinery closures, as was the fate for several Latin American refiners," Mr. Tran said.

"The oil price downturn has left several resource-rich, but financially imperiled, Latin American countries with the inability to produce enough product for domestic consumption."

And with almost 5 million barrels of refined products a day, the U.S. can have a global impact, even though much of America's production is aimed at Latin America.

"Disruption risk does not end with the Americas given that Europe is a sizable taker of U.S. distillate and Asia imports nearly 1 million barrels a day of U.S. product," Mr. Tran said.

"Latin America is the first to feel the pinch, but any hiccup in U.S. product exports sends significant ripples throughout the rest of the oil complex and keeps Atlantic Basin refining margins supported," Mr. Tran said.

"Simply put, the U.S. quietly influences and directs a significant and growing portion of the global refined product trade."

There's something else going on that bears pointing out, unique to Canada: The spread between Western Canada select and West Texas Intermediate, the U.S. benchmark, is now at its biggest in about four years.

"Keystone pipeline disruptions have been the main impetus in the move beginning late last year, while temporary sourcing issues by rail providers have exacerbated the problem (with rail transportation the 'swing factor' now in increasing oil sands supply)," said Mark Chandler, RBC's head of Canadian rates strategy.

But RBC's oil analysts think that spread will narrow in time, leaving the average 2018 discount of $16 (U.S.) a barrel compared to the $27.50 on Wednesday.

These issues are standing in the way of Canadian producers "reaping the full benefits of the global oil rally," added Sue Trinh, RBC's head of Asia foreign exchange strategy in Hong Kong.

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Markets at a glance

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ECB holds the line

The European Central Bank held steady on policy today, though there was a lot to be said about the euro.

ECB chief Mario Draghi wasn't expected to change rates or asset purchases, and, indeed, he didn't.

"ECB President Draghi had a great opportunity to cool the EUR's heels this morning but he did not do so," said BMO senior economist Jennifer Lee. "Or, at least, the market didn't allow it as the USD continued to weaken broadly. There was much more discussion about currencies over the hour-long press conference than before."

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    Retail sales up

    Canadian retailers chalked up their third straight month of gains in November, though a lot of that had to do with how much more we paid at the gas pump.

    Retail sales rose 0.2 per cent, driven by gas stations, electronics and appliance stores, and general retailers, Statistics Canada said today.

    When you strip out the price change impact, sales rose 0.3 per cent by volume.

    "Canadian consumers flocked to the stores for Black Friday sales and to get the new iPhone, though softness in autos weighed heavily on overall spending," said Benjamin Reitzes, Bank of Montreal's Canadian rates and macro strategist.

    "The gain in retail volumes combined with better manufacturing and wholesale activity puts November GDP on pace for a 0.4-per-cent gain. That would place the risks squarely on Q4 GDP growth coming in below the Bank of Canada's 2.5-per-cent call and closer to 2 per cent."

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