Surging oil price ‘not a game-changer’ for the Bank of Canada

Jeff Lagerquist
Fri., October 15, 2021

Climbing crude prices are “not a game-changer” for the Bank of Canada heading into its October rate decision, according to the latest analysis from Capital Economics. The London-based research firm expects the rise will be short-lived, and Canada’s central bank will remain focused on “more important indicators” like wage growth and soaring inflation.

West Texas Intermediate (WTI) oil (CL=F)​​ is set for its eighth consecutive weekly gain, the North American benchmark’s longest winning streak since 2015. WTI rose 1.14 per cent to US$82.24 per barrel as of 11:44 a.m. ET on Friday, a day after the International Energy Agency (IEA) predicted the “ongoing energy crisis has prompted a switch to oil that could boost demand.”

West Texas Intermediate oil has pushed higher through much of 2021.

“While demand has risen alongside the recovery in the global economy, the elevated level of prices is mainly because supply is still depressed, reflecting the fall in U.S. output, which was exacerbated in recent months by Hurricane Ida, as well as OPEC’s production cuts,” Capital Economics senior Canada economist Stephen Brown wrote in a research note on Friday.

“Due to the potential for supply to recover, particularly now there is an added incentive from higher prices, we continue to expect WTI to decline to US$57 by the end of 2022.”

Brown says the Bank is set to use a WTI price of US$80 per barrel for its forecasts in the October Monetary Policy Report (MPR), up from US$70 in the last MPR. However, he sees few reasons for a material upgrade to its view on the sector.

“Canadian companies still seem intent on using the rise in prices to pay down their debts rather than fund new investment. Those debts are substantial, with the oil and gas sector accounting for much of the overall rise in corporate debt in the past decade,” he wrote.

Brown also cites long-standing headwinds for the sector, including a lack of pipeline capacity, and rising concern about climate change. He also notes that the oil, gas and mining sector accounts for “a disproportionately low share of jobs.”

“As governor Tiff Macklem reiterated again last week, the more important indicators to watch are wage growth and inflation expectations,” he wrote. “We are therefore doubtful that the further rise in oil prices will move the needle much in terms of the Bank’s approach to policy in the next couple of years.”

The Bank is set to make its latest rate announcement on Oct. 27.

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.