In a recent report, TD economist Leslie Preston says Canadian oil companies are somewhat sheltered from plunging oil prices in part because the decline of the Canadian dollar is cushioning the blow.
Commodities like oil are priced in U.S. dollars. And even as oil prices have shed more than a quarter of their value in recent months, so too has the Canadian dollar declined a little. That's allowed Canadian oil companies to squeeze more loonies out of the U.S. greenbacks they receive for their oil.
"Several factors, including a weaker Canadian dollar and lower discounts for Canadian crude oil, mean that the recent hit to prices received by Canadian producers is less severe than the global oil price decline suggests," Preston said.
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Many types of oil
Not all oils are created equal. The most-desirable blend of oil in North America is known as West Texas Intermediate. Europe and the rest of the world, however, uses Brent crude — named after the Brent oilfield under the North Sea just outside Norway.
Canada actually makes both blends, from conventional oil wells in Alberta that pump out WTI, to operations off the coast of Newfoundland that make Brent. But increasingly, the type of Canadian oil that's projected to grow the most is called Western Canada Select, which is the name for the thicker oil that comes out of the Athabasca oilsands in northern Alberta.
Although they serve similar local markets, the price of WCS has been much lower than WTI for several years now, as the thicker Canadian blend requires more processing to be converted into useful oil products, which means refineries are willing to pay less for it.
At times, the gap has been as much as $40 a barrel. But that gap has been narrowing as new pipelines and a booming business shipping oil by rail has made the system more efficient at getting oil to market quickly — so much so that the gap now sits at about $15, but has been as low as $8.
WTI has lost more than $25 a barrel since the summer. But WCS is off by about $12 over that same time period — meaning oil prices are all going down, but not at the same rate.
Consider that the average price per barrel that Canadian oil companies have received for their product in the past month is actually higher today than it has been for the last 4½ years. Brent prices, meanwhile, are currently 15 per cent cheaper now than they have been since the recession.
Add it all up, and it means Canadian oil companies are getting comparatively more for their product — and seeing a second bump to their bottom line when they convert their U.S. dollar-denominated sales back into loonies.
"This is a bit like being the cleanest dirty shirt," Preston said. "The hit to western Canadian producers from the recent price correction is less severe than it appears."
Existing projects are in no danger of becoming unprofitable and having to turn off the taps, but that's not to suggest everything is rosy in the oil patch — new projects would likely get shelved if prices stay this low for long.
And oil companies themselves aren't the only ones feeling the financial pinch. Alberta's government relies on royalties for 25 per cent of its operating budget, Preston said in her report, and recent estimates suggest governments in Ottawa and other provinces are almost as reliant on oil money.
"The recent price slide … has knocked some wind out of the sails of the sector," Preston said, "but oil producers are used to swings in prices, and a lower price profile over the next couple of years is unlikely to prove to be the knockout punch for the industry."