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Canadian crude index outperforms WTI, as oil sags and natural gas rallies

11th March 2017

By: Henry Lazenby

Creamer Media Deputy Editor: North America

     

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VANCOUVER (miningweekly.com) – While crude oil was in a tight range in January and February, the price of crude oil has risen since the election of US President Donald Trump last November.

That was until early March, when the West Texas Intermediate (WTI) benchmark corrected and this week dipped below the psychologically important $50/bl level for the first time since early December.

However, the top performer in both the period between the US elections and December 30 and in the first 60 days of 2017, was the Canadian Crude Index (CCI), Auspice Capital Advisors founder and chief information officer Tim Pickering told Mining Weekly Online by telephone from Calgary.

The CCI reference price climbed 26% between November 8 and December 30, and 6% up to March 1, outperforming WTI prompt-month prices by 18% and 0.5% over the same timeframes, respectively.

Pickering notes that while the reasons could be many - US refinery demand for Canadian heavy-sour feedstock; increased US exports supplying growing global demand; Canadian federal government approval of the TransMountain pipeline; Canadian producer and citizen desire to move away from dependency on the US as a buyer; the Trump administration’s interest in TransCanada Pipelines' finishing the Keystone XL pipeline; and the fact that the discount to the WTI had widened from $10 in mid-2015, to $15 at election date - the fact remains that the Canadian benchmark has outperformed and has more positive momentum than WTI despite the recent tight range.

“There are two key observations here,” Pickering noted,” the narrowing of the differential from $16 to $13, or 19%, and that the correlation between the two benchmarks has dropped.”

According to Pickering, this means that demand for Canadian crude has been acknowledged by the US and that Canada's desire to diversify from the one (US) buyer of Canadian crude, can provide independent movement that could lead to unique results.

Historically, this has meant that CCI has outperformed and been more volatile. This may include larger gains on rallies (as experienced from the January 2016 lows until June) but also sharper falls in falling markets (as we saw in 2015 leading into early 2016), he explained.

Should the trend continue, and both the differential and price improve, the effect on returns will continue to outperform the WTI market owing to both the discount (higher returns for the same gain) and the stable to improving spread.

“Depending on your view of where the global oil market is headed from here, the Canadian crude market and the CCX exchange-traded fund [that tracks the CCI] are positioned to provide an accelerated ride,” Pickering noted.

WTI on Friday lost another 1.6% to settle at $48.49/bl.

Meanwhile, natural gas has been rallying over the past 15 days, breaking out from a general sell-off so far this year, and gaining more than 8% over the past ten days. Pickering noted that natural gas also started to rally, coinciding with the US Presidential elections, but weather-driven factors were the main drivers until December, when milder North American winter temperatures ensued, bringing a correction from January onwards.

Pickering notes that the recent natural gas price bounce was a first in history, as it coincided with an inventory build of around seven-billion cubic feet of gas in the last week of February. On Friday, the rally continued, rising above $3 per million British thermal units.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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