The rebound in global oil prices over the past month has not been matched by those in Canada, with Western Canadian Select (WCS) instead trading closer to $60 per barrel, as the discount between WCS and the US WTI benchmark has widened to a post-pandemic high of $26. The wider discount partly reflects the ongoing withdrawals from the US Strategic Petroleum Reserve, as the oil released more closely resembles the heavy, sour grades produced in Canada than the light, sweet WTI. Demand for Canadian oil has also been hit by unplanned refinery shutdowns, which will prove temporary, although the futures market still implies a relatively wide WCS discount of $19 even by 2024. WCS is now 50% lower than the Bank of Canada assumed in its July Monetary Policy Report (MPR), which is another reason to expect the Bank to downgrade its forecasts for GDP growth in its new MPR on Wednesday. The unplanned refinery shutdowns that have contributed to the wider WCS discount have also driven a renewed increase in gasoline processing margins, however, with the 10% m/m rise in retail gasoline prices this month implying that headline CPI inflation will rise back above 7% in October, risking a further increase in near-term inflation expectations. Accordingly, the weakness of Canadian oil prices is unlikely to cause the Bank to dial back its hawkishness.
Canada Drop-In (26th October): We’re holding a briefing on the Bank of Canada decision shortly after the Wednesday 26th policy announcement. Register to join our discussion about how close the Bank might be to pausing its tightening cycle, housing market risks and whether interest rates could be cut next year. Register now.
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