Canadian oil prices have surged since Alberta called for a cut in production. But some are asking if this will be enough to address oversupply, takeaway capacity concerns and the oil discount. Anthony Okolie talks with Brian DePratto, Senior Economist, TD Bank Group.
Canadian oil prices have surged ever since the Alberta government called for a cut in production. Western Canadian Select had been sitting at historic lows because of rising production, pipeline bottlenecks, and falling global prices. For a look at the implications, we are joined by TD Economics' Brian DePratto. Brian, you say in your report drastic spreads call for drastic measures. How drastic was this?
Pretty drastic. You mentioned already that if you look historically on the heavy spread, we've never seen anything quite so wide. It usually has a little discount. But this was just unprecedented. As well, even some of the lighter, sweeter blends, which normally trade pretty close to their American benchmarks, those started trading at a pretty sizable discount, as well, which we've never really seen before. On the flip side, the government response, a 9% production cut, that's pretty sizable-- so really a bit of an unprecedented experience.
Well, it seemed to have worked. Oil prices have rebounded. Do you see prices holding at these levels?
We think, more or less, yes. And there's a big star around that. In terms of the spread to the-- to WTI-- so that big discount-- we're probably a little bit of an over-correction there. So we think something more like $20 discount rather than the $10 to $15 we're seeing now makes a little more sense until a lot of those issues are fully resolved. But we're definitely through the worst of it. And that's the positive aspect.
And how are companies reacting? What are the implications for capital spending in the region and to Alberta's economy?
Well, this certainly comes at a relatively challenging time there. So we've already seen some announcements of capital pullback-- so spending a little bit less next year. In terms of the employment aspects of it, we don't think it's going to be necessarily that bad, let's say.
But it's certainly not positive. And we're talking about an aspect here where a lot of the projects are coming on or have come online, in fact, causing some of the problem this year. And that's a natural phase, where the employment levels tend to get a little bit lower there as things run as normal rather than ramping up.
And to switch gears a little bit, the Bank of Canada has talked about the risks of low oil prices. What are the implications for interest rates?
Well, there's two ways of looking at it. They set monetary policy for-- not for right now. They set it, basically, for a year, two years, down the road. It takes time for that to come through. So if you have something that's a temporary shock, which this should be, and we've already seen some of the recovery, then that's something that shouldn't really move them off their long-term path if you know the economy's-- it's going to rebound.
The other side of it, of course, is risk management. Oil prices can be very volatile. Certainly, looking back at 2015, 2016, we had a big slowdown in Canadian economic growth as a result of oil. And so for that reason, we think this is a-- more of a pause.
From a risk management point of view, they're going to wait. They're going to make sure that this recovery we've seen really is being sustained. But ultimately, we do think they'll continue on their hiking path.
Brian, great insights. Thank you very much for joining us.