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How low will gas go?

Screen Shot 2020-03-24 at 12.28.39 PM“Oil markets are poised to get worse before they get better, ushering in a new era for petroleum,” U.S.-based Citi Bank said in a recent note to its clients. Already, oil is being produced below the cost of production, with prices falling for Western Canadian Select Crude to under (US) $10 (actually hit (US) $7.36) a barrel for the first time.

Simply, the petroleum market got hammered with a one-two blow, where demand has fallen off sharply and supply has increased dramatically. The result is dispenser prices that few of us have seen in recent years.

The COVID-19 concern has Canadians staying at home and working in place. This means less fuel usage for things like commuting and air travel. Less demand drives prices downward. Add to this the recent dust-up between Russia and the Saudis over OPEC production targets, whereby both parties are pumping oil like there is no tomorrow. Russia is selling at a loss as a way to build European market share and the Saudis (and UAE) are battling back with excess production to bring pressure onto Russia in a bid to get them to ratchet back well flows. The upshot is a glut of petroleum products at a time when world demand is at an all-time low.

The Russians have said they have enough reserve capital to keep up this fight well into next year. The Saudis have cash to burn, as well as low production costs, and have said they will keep up pressure till the sides get back to the bargaining table.

Here in Canada Syncrude and Suncor have scaled back maintenance work on upgraders due to COVID-19 and the companies’ inability to obtain workers for the task. The result here is that synthetic crude continues to flow at a time when levels were set to be throttled back. The result is even more capacity in the system.

The outcome is that gasoline prices have fallen and could drop even more. Some analysts predict an additional 10% to 15% decline under canopy as we move into April. A look at prices this week sees Vancouver around the $1.00 mark for a litre of gas. This is a drop from the high of $1.70 we saw last year. British Columbia is around 0.75 cents a litre. Ontario is reporting sales of 0.59 cents and Calgary motorists discovered pumps offering prices of 0.55 cents Tuesday morning. Nova Scotia is selling as low as 0.66 cents.

The bottom line is that Canadians can expect gas prices to decline further over the short term with prices in Ontario possibly coming in around the 0.60 cent mark later next month. Until Russia and OPEC makeup and play nice expect the barrel price to continue to stay low for the foreseeable future.


Shutterstock

Fuel prices and Canadian dollar expected to show gains in 2020

Shutterstock

Shutterstock

A spike in current and long-range gasoline pricing will come as no surprise to retailers and most Canadians. Expect the cost of fuels to rise at the dispenser as we move into 2020. These hikes happen due to four factors that determine the consumers’ price. Dispenser price is impacted by the cost of crude oil, the margins at the refinery, the cost to market fuel, and taxes. Here, key elements are the rising price of crude and—thanks to carbon pricing schemes—taxes are up as well.

Roger McKnight

Roger McKnight

According to market analyst Roger McKnight of En-Pro International, an Oshawa, Ont.-based consultancy, two key crude oil price factors will combine to bring up pump prices. McKnight points out that in West prices are determined by what is known as ‘Gyration of Crude’ a factor that takes into account world pricing, while the East is impacted by straight up market speculation. These forces will come together as the world faces another political challenge in the Middle East.

Already prices were on the rise thanks to the January 1 rollout of our Carbon Tax. The tax adds about 4.5 cents to each litre of gasoline. McKnight suggests that Canadians could see a spread of 18 cents between prices in Toronto and Calgary under these conditions, due largely to the lower tax burden in Alberta.

The cost of raw materials is also up. Currently Brent Crude is above (US)$70 a barrel up (US)$4 since last week. Prices have not been this high since September when drones took out some of Saudi Arabia’s Aramco capacity.

Retailers are reporting prices at fuel dispensers are up, too. This week, Vancouver stations are selling a litre of fuel for $1.41, with Calgary showing 0.99 cents (+2%) on dispensers. In Toronto, Montreal and Halifax, prices are also up, with Montreal hitting a high of $1.27.  Expect fuel prices to keep edging upward as world events ramp the challenges to routine shipments.

On the bright side, Canada is the world’s fourth-largest oil producer and as such our dollar is tightly wound with world crude pricing that is bought and sold in U.S. dollars.  Expectations are that, thanks to a resurgence in oil prices, the Canadian dollar will hit 82 cents U.S. sometime in 2021. When oil prices climb, the amount of U.S. dollars Canada earns on each barrel of oil it exports is high. Indeed, we export 96% of our oil output to the U.S. As such, the increase of U.S. dollars flowing north creates a rise in the value of the Canadian dollar. This increase in Canada’s dollar value means imported goods are less expensive. This can have a positive impact on the refining margin, where many of the products used to produce gas and diesel are purchased in U.S. funds.

One thing is for sure. Expect market volatility and crude price climbs over the next few months as world political conditions remain in flux.