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Canada could finally get ‘world price’ for oil after Alberta-B.C. agreement

Posted on Nov 8, 2013 in Mortgage Market Updates and News

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John Shmuel
 
 
A potential oil agreement between British Columbia and Alberta is very good news for Canada’s economy and currency, says the National Bank of Canada.
 
On Tuesday, the premiers of both provinces announced they had reached a ”framework agreement between the two provinces on moving energy resources to new markets.” The announcement is widely seen as laying the groundwork for pipelines to be built that would carry Alberta’s oil to the B.C. coast, where it can be shipped to Asian markets.
 
“The message to international investors is a powerful one — Canada will eventually have the ability to diversify its oil exports away from the U.S., and hence get a ‘world price’ for its products,” said Krishen Rangasamy, senior economist at National Bank.
 
The agreement between the two Western provinces is a long-term positive for the Canadian economy
Canadian oil currently trades at a discount to oil blends refined in other markets. A variety of factors have created that spread, including a lack of capacity to pump oil beyond the United States and an oil glut in the U.S. that has created less need for Canadian oil.
 
That has led to a US$40 gap between Western Canadian Select, the benchmark pricing for Canadian oil, and Western Texas Intermediate, the benchmark for U.S. oil.
 
“The shortage of pipeline capacity has cost our oil exporters dearly as they have been forced to accept rock bottom prices at the U.S. border, as evidenced by large oil spreads for WCS relative to other blends,” Mr. Rangasamy said.
 
The agreement, if it does lead to the building of pipelines, will help close that persistent gap. It will also be a huge boon for the Canadian economy, which hasn’t grown as fast as it possibly could because of lower oil prices.
 
“The agreement between the two Western provinces is a long-term positive for the Canadian economy and its currency, not only because it will reduce the spreads, but also because it makes foreign direct investment into the oil sands more likely,” Mr. Rangasamy said.
 
He expects the news will help drive the loonie higher next year, likely reaching parity with the U.S. dollar once again by the end of 2014.


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