Briefing highlights
- We'll pay for the OPEC deal at the gas pump
- Output cut expected to boost inflation
- CIBC boosts dividend as profit climbs
- TD profit also rises in fourth quarter
We'll pay at the pump
Brace yourself for potentially higher prices at the gas pump.
Canada’s oil patch, and its stakeholders, are no doubt hailing the OPEC deal that’s driving up crude prices. Consumers, maybe not so much.
There’s a lot at stake, and many questions after Wednesday’s agreement in Vienna, but oil company shareholders are already enjoying higher stock prices, as The Globe and Mail’s Tim Shufelt reports.
Many others no doubt care more about the cost at the pump, and where they could be headed after the big savings we’ve enjoyed since crude prices collapsed.
“It’s pretty clear that, if the OPEC deal sticks, gasoline prices will be moving higher,” said Bank of Montreal chief economist Douglas Porter.
But there’s a lot to understand before we get “carried away,” as Mr. Porter put it.
First, he noted, West Texas intermediate crude, the U.S. benchmark, closed Tuesday at just about $1 higher than where it stood a week ago, and it’s still shy of where it was in mid-October.
“Moreover, pump prices are also affected by how the Canadian dollar fares, as well as refining and retailing margins, so there is not an exact link between oil and gasoline prices.”
What’s most important, though, according to Mr. Porter and others, is whether OPEC actually sticks to the pact.
“If it does, then we could see the oil market balance very quickly and begin to put much more serious upward pressure on prices by early next year, and that’s when we could see some significant gains in gasoline prices,” he said after the agreement was unveiled.
“But while today’s price action was impressive – the market was caught a bit by surprise by the deal – many will remain skeptical that producers will maintain discipline for long.”
Oil prices shot up as OPEC countries agreed to trim output by about 1.2 million barrels a day, to 32.5 million, as of Jan. 1. Big non-OPEC producers such as Russia have also agreed to a cut of 600,000 barrels.
Among the OPEC countries, Saudi Arabia is cutting by more than 485,000 barrels, while Iraq caps its output at 200,000. Libya and Nigeria have been granted exemptions.
Royal Bank of Canada strategists, who believed all along that a deal would be struck, also believe it will stick, citing, among other things, the creation of a monitoring committee to enforce the pact. Two non-OPEC nations will be on that committee, as well.
“In other words, today’s announcement is the strongest statement, with key quantifiable measures of accountability, seen from the group in recent years,” Helima Croft, RBC’s head of commodity strategy in New York, and her colleagues Michael Tran and Christopher Louney said in a report.
They forecast oil at an average $56.40 a barrel in 2017, with the first-half “averaging in the low $50s before inching into the low $60-a-barrel range by late next year.”
That would take us markedly higher than where we are now, though Ms. Croft, Mr. Tran and Mr. Louney see a gradual rise.
“A slow and steady move higher in prices ultimately wins the sustainable recovery, in our view, and we continue to see prices grinding upwards over the coming quarters rather than gapping significantly higher,” they said.
“Global oil balances remain fragile, caught in a push-pull situation where the global rebalancing act repeatedly proves it is indeed a lengthy process, while the elasticity of U.S. shale has proven itself a quicker process,” they added.
“In other words, a sharp move higher in prices could inadvertently resurrect price-sensitive non-OPEC production.”
As Mr. Porter stressed, there is skepticism surrounding the deal, given OPEC’s history, though analysts believe this pact is significant.
“The fact that OPEC member countries have signalled their intent to help bring the market into balance is a positive for oil markets,” said Toronto-Dominion Bank economist Dina Ignjatovic.
“The deal is for six months, or possibly a year, suggesting that after that time-frame, production could shoot back up as OPEC producers resume their fight for market share,” she added.
“What’s more, OPEC members are notorious for producing above target levels, which would prolong the rebalancing process. And, the exemption of Libya and Nigeria presents some upside to OPEC’s total production. Until markets see an actual cut in production, prices will be hard-pressed to gain much further ground on a sustained basis.”
Ms. Ignjatovic believes OPEC members will in fact cut output, though possibly not to the extent of their deal. On that basis, she forecasts crude prices of between $45 (U.S.) and $55 a barrel in the next year, rising to the latter level by mid-2017.
Under that scenario, we’re not far off from where we’ve been.
“As for gas prices, they tend to move - at least directionally - with oil prices unless there is some event specific to the gasoline market like we saw earlier this year,” Ms. Ignjatovic said.
“Given our outlook for oil prices to remain range bound, gas prices will likely do the same.”
Inflation to rise
With higher prices, of course, comes stronger inflation readings, which had already been expected given president-elect Donald Trump’s economic plans.
Now, add higher fuel costs into the mix
“Ultimately, the devil will be in the implementation [of the OPEC deal], and yesterday’s rebound, while large, only returned prices to the levels they were a month ago, and still below the October peaks,” said CMC Markets chief analyst Michael Hewson.
“That being said, yesterday’s oil rally does appear to have put a short-term floor under the price, and as such has helped to push bond yields up across the board,” he added.
“The biggest jumps came in U.S. and U.K. yields as they pushed back towards their November peaks, as markets started to price in firmer inflation expectations.”
CIBC boosts dividend
Canadian Imperial Bank of Commerce boosted its dividend as it posted a jump in fourth-quarter profit.
CIBC profit climbed to $931-million, or $2.32 a share, from $778-million or $1.93 a year earlier. The bank cited a total hit equal to 28 cents a share from severance and other items.
Adjusted profit rose to above $1-billion, or $2.60, from $952-million or $2.36.
The dividend goes up by 3 cents to $1.24.
“In 2016, CIBC delivered record net income, industry-leading capital strength and the highest return on equity of the major North American banks,” chief executive officer Victor Dodig said in a statement.
That return on equity came in at at 19.9 per cent for the year, or 19 per cent on an adjusted basis.
TD profit climbs
Toronto-Dominion Bank also posted a jump in fourth-quarter profit, its chief executive officer saying investments are paying off.
TD profit rose in the quarter to $2.3-billion, or $1.20 a share, from $1.8-billion or 96 cents a year earlier.
Adjusted profit came in at $1.22 a share, up from $1.14.
CEO Bharat Masrani said the results highlighted the strength of its business mix, its strategy and “the investments we’ve made to become a more productive and customer-focused organization.”
Return on equity rose to 13.3 per cent from 11.4 per cent a year earlier, or 13.6 per cent from 13.5 per cent on an adjusted basis.