Oil Prices Have Increased 300% in the Past Two Months

Canadian oil prices had a rough 2018.

Not only did the spread between West Texas Intermediate (WTI) and Western Canadian Select (WCS) hit a record of over $50 USD / barrel, prices of WCS bottomed out near $10 / USD in November.

Reflecting back on last year, our mood on the market seemed to move in tandem with the price of oil (chart below).  Early in 2018, business sentiment seemed to be increasingly more positive following the difficult provincial recession.  Oil prices – at least WTI prices – were on the rise and there was a healthy optimism in the market.  We sensed a number of businesses were encouraged by recent economic developments, tying in conveniently with the price of WCS roughly doubling as we went into the summer.

That all changed, literally overnight, on August 30th.  That’s the day Canada’s Federal court of Appeal overturned the approval of the Transmountain pipeline.  With WCS prices had already dropped to roughly $40 / barrel at the time, and that court decision saw prices drop even more dramatically.   In the course of a few months, the price of Canadian oil dropped 80%.

To say the situation was dire would be an understatement.  The spread between Canadian oil producers were selling oil at compared to other world producers became front-page news.  The Heavy Crude Discount, as it’s known among commodity traders, became a very well-known term.  Industry groups stressed how much money this spread was costing the provincial and federal government and protests starting popping up all over the province.

With prices bottoming out in November, and in an effort to curb the losses, the provincial government imposed cuts in production. The chart below shows both the sharp decline caused by the Court of Appeal decision and the subsequent increase as a result of the production cuts.  Since hitting rock bottom, the price has since increased 300% (!) and the spread has narrowed to under $20 / USD.

So while our headline is technically accurate, we essentially manipulated the data to take the lowest point and compared it to today’s increase.  There is no doubt the price of Canadian oil prices has improved, but it does follow a completely unprecedented decrease.

 

 

The media coverage, protests, convoys and political discussion emphasizes how important the industry is to our economy.  In fact, the oil and gas industry is directly responsible for over 20% of Alberta’s GDP.  When one industry has that much influence on an economy, it’s not a stretch to suggest that a large remaining portion of the economy is heavily dependent on it.  After all, how would the construction, manufacturing and retailing industries in Alberta look without the oil and gas industry?  How would the housing and commercial real estate market look if those oil and gas jobs and companies did not exist?  Would cities and towns be able to offer the same amenities and services?  Would we need as many civic employees?  What about the restaurants, car dealerships, accountants, lawyers and engineers who proudly count members of the industry and their clients and customers.  What about doctors, teachers, nurses, firemen and police officers that are paid by tax payers – which includes, of course, oil and gas employees?

The oil and gas industry is indeed an instrumental economic engine for our local, provincial and national economies.

Not only are we unapologetically proud of the oil and gas industry, one of the main themes of our blog is drawing attention to the connection between oil prices and Edmonton’s commercial real estate market.   We write about the topic often as we feel there is no other single metric that will influence Edmonton’s commercial real estate market.  Whether it’s rental rates, vacancy or absorption, oil prices play a pivotal role in each of those outcomes.

We’ll continue writing about other commercial real estate topics, including notable sales, new construction projects, interesting news, or even just general market information, but also continue to expect articles on the oil and gas market and the impact on Edmonton.

Also, if you feel there is a topic you would like covered, please feel free to contact us here.

 

 

 

 

Notes / sources:

WTI prices based on the average price for the calendar year.  We used the current front-month future price of WTI for 2019 on the chart.

GDP prices sourced from Conference Board of Canada.  2019 is their average of the four-quarter estimate for the upcoming year.

 

Our Team

Chad Griffiths

Chad Griffiths

Partner, SIOR, CCIM

Chad is a partner with NAI Commercial Real Estate and focuses on the Greater Edmonton area. Chad entered the industry in 2004 and has completed over 400 commercial transactions with clients ranging from small, local companies to large institutional owners. Chad has been a top 15 producer with NAI Canada-wide since 2013.

Ryan Brown

Ryan Brown

Partner, BCom, SIOR

Ryan is a partner with NAI Commercial Real Estate in Edmonton and is currently ranked nationally as one of NAI's top advisors. Having executed in excess of $100 Million worth of sales transactions and over 2 Million square feet of lease transactions, Ryan has developed a firm understanding of asset evaluation and an aptitude for building design, functionality, and long-term practicality.

Darcie Bouteiller

Darcie Bouteiller

Associate

Darcie is a licensed Commercial Real Estate Agent in the Province of Alberta with a focus on the Edmonton market and its surrounding areas. Darcie accomplishes custom solutions for her clients through her personable nature and results driven attitude. Darcie can help if you are looking to invest in commercial real estate or are looking for representation for a sale or lease transactions.

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