News & Updates

    The Morning Brief - 12.04.18

    Posted by Bruce Carson on Dec 4, 2018 7:21:46 AM


    Economy—Reaction to Alberta Oil Production Cuts—President Trump and USMCA Approval by Congress

    Reaction to Alberta Oil Production Cuts 

    Yesterday, a number of Canada’s Bank economists commented on the effect that the oil production cut ordered by the Alberta government will have on the Canadian economy. As noted here yesterday the cuts will begin on January 1, 2019 and continue throughout the year. The plan is that through the output cuts approximately US$4 will be added to the price of a barrel of Western Canadian Select which would bring in over $1 billion to the treasury.

    BMO economists believe that GDP will expand by 1.8% instead of 2.0% as previously predicted if there are extended shutdowns in the oil sector. Royce Mendes of CIBC said the production cut would take 0.1point off growth in 2019 and that this could lead him to change his prediction for a rate increase in January, 2019.

    Also dealing with the Bank of Canada, with the production cuts on the horizon there is less reason for the Bank to be “very hawkish” this week on rates, according to Mendes.

    The downside to the output cut is, according to CIBC that companies are less likely to invest with lower prices in the sector. This was one of the criticisms of the capital investment write off provisions set out in the government’s economic update as it would not be utilized to any great extent in the oil patch as there is little expansion or investing occurring there.

    Doug Porter of BMO Capital Markets predicts no move from the central bank this week but the odds are increasing that the hike will take place in January. Porter is quoted as saying that low oil prices will do more lasting damage to the economy.

    TD Bank looking at the cut to begin next year stated that it would weaken oil markets which could curb GDP growth by 0.1% to 0.2% in 2019.

    Brian DePratto, of TD said that “all negative impacts will be heavily front loaded in the year, in line with curtailment plans.”

    So according to yesterday’s canvass of views this cut back will affect economic growth but could result in a hike in interest rates being put off until early next year.

    Saskatchewan and Production Cuts

    While Premier Moe announced yesterday that he supported Premier Notley’s production cuts announced on Sunday evening, Saskatchewan would not be following Alberta’s lead on this. While Notley did reach out to Premier Moe, he did say that he would work with industry so as not to undermine what would be taking place in Alberta.

    Moe explained that Saskatchewan has a different energy mix than found in Alberta as there are no oil sands in production in his province. Production is more diverse than in Alberta as more than 60% of oil production is light to medium crude.

    Presumably vertically integrated oil companies located in Saskatchewan may take advantage of the fact that there is no cutback in production in that province.

    Globe Editorial

    The Globe put its support for Notley’s actions quite simply “faced with no good alternative, the Notley government made the least bad choice.”  The view was that this action was necessary as a short term solution. There are medium term solutions in oil by rail and Enbridge’s Line 3 opening late in 2019. The long term solution is the Trans Mountain pipeline should construction start again after the consultations and various challenges to their findings are resolved.


    There is concern among those who opposed this action by the Alberta government that it will have unintended consequences which will be harmful. Alternatively it seems to have support as the least bad option on the table if indeed the government was going to address the price gap.

    President Trump and USMCA Approval by Congress

    The signing ceremony of the USMCA in Argentina while it actually occurred, also gave Prime Minister Trudeau the opportunity to raise publically with President Trump the desire to have the steel and aluminum tariffs lifted. He might have also added softwood lumber to the list. While it is impossible to know when these tariffs will be lifted, at least Canada received the side letter deal with auto tariffs from the U.S.

    On the flight back from Argentina Trump spoke about how he intends to proceed with ratification. He indicated that he will give the six month notice required that the United States would be pulling out of NAFTA. It is his view that he will be putting a stark choice in front of Congress; approve the new USMCA or there will be no trade agreement in existence between the U.S., Canada and Mexico.

    Congress in effect would have six months to approve the deal from whenever Trump gives notice of withdrawal. Hopefully the Democrats in the House of Representatives can work through their objections to the deal which seem to be concentrated on the enforceability of labour clauses as they affect Mexico and whether more should be added to this section.

    On the way to signing the new deal there were plenty of threats from President Trump to withdraw the U.S. from NAFTA. Those threats led to a discussion among trade lawyers as to what would be the result should such notice be given. It was noted that the legislation which implemented NAFTA would probably have to be repealed by congress and should that occur then would the original Canada-U.S. Free Trade Agreement come into effect, governing trade relations between Canada and the U.S?

    The original FTA was never repealed as its operation was suspended.

    Finance Minister Morneau in New York yesterday said that he had a “high level of confidence” that the new NAFTA would be ratified. He said he takes President Trump’s comments to withdraw from NAFTA seriously; however he did admit he had no insight as to when this will happen.

    Hopefully the President’s attempt to force Congress to act to approve the USMCA within six months will not deteriorate into legal wrangling over whether NAFTA still exists as long as the implementing legislation has not been repealed and that focus will remain on adopting the new trade deal.

    To Come

    --today, Conservative Party Opposition Day dealing with the “looming job crisis”

    --today, COP 24 continues in Poland

    --December 5, Bank of Canada deals with interest rates

    --December 6-7, OPEC meeting in Vienna to discuss oil output

    --December 6, international trade numbers for October to be released

    --December 6, Bank of Canada Governor Poloz delivers a speech in Toronto discussing the Bank’s interest rate decision

    --December 7, job numbers for November to be released

    --December 7, FMM in Montreal on economy and trade—more on this meeting tomorrow--bc

    Topics: Morning Brief

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