MNI INTERVIEW: Alberta Rides High Oil, BOC Relief-Ex Official

Canada's oil capital of Alberta will outperform next year on high crude prices, the expansion of the TMX pipeline and central-bank rate cuts likely to start in June that will support the country's fastest-growing population, a former top provincial finance official told MNI.

High crude oil prices provide a modest boost to capital spending though nothing like the rush seen before 2015 as companies focus on efficiency according to Mark Parsons, now chief economist at ATB Financial in Edmonton. He has also worked as a researcher in Canada's finance department.

Alberta's is leading Canada's record population growth with immigrants and native-born people taking advantage of more affordable housing and job gains, Parsons said. While the province's younger population has perhaps been hurt more by the Bank of Canada's 10 interest-rate hikes, he expects Governor Tiff Macklem to lower the benchmark rate from 5% to 4% through next year.

Making sure inflation and price expectations are under control again with CPI above target for almost three years now will keep officials cautious about easing too soon, Parsons said. Alongside the need for multiple months of progress in CPI figures the Bank needs proof that wage gains aren't sticking around the current pace of more than 4%, he said. (See: MNI INTERVIEW:Productivity Curbs BOC Cut Enthusiasm-Ex Adviser)

REASONABLE BET FOR JUNE

“If those two things happen, and if the core readings cooperate, then I think June is a reasonable bet” for a rate cut, Parsons said. “There are enough meetings in the second half that allow them to do quarter point moves, to land at four,” he said.

Most economists tracked by MNI see the Bank rate cutting by April or waiting until sometime in the second half of 2024 to start cutting. Market pricing for cuts has been overly eager through much of this year and the Bank's signal of a pause last spring unleashed another wave of frothy housing gains. (See: MNI INTERVIEW: No BOC Rate Cuts Until Later In 2024-Conf Board)

“If the Bank of Canada moves too quickly cutting rates, then that can sort of get markets excited thinking that the inflation battle’s officially over, and I think that would be a little bit premature to signal that,” he said. “They are going to move cautiously after making the first move.”

In past decades, tight BOC policy aimed at central Canada led to anger as Alberta was struggling. This time, even with Alberta's younger population arguably pinched more by higher mortgage rates, Parsons said the relative strength of his province's economy has changed the dynamic.

GLOBAL ENERGY SECURITY

Alberta's economy will grow 2.1% next year versus 0.7% for Canada, Parsons said, citing energy investment and hiring to expand production. Output curbs by OPEC+ will likely outweigh any drag on global oil demand from slower growth in the U.S. and China, he said, giving local producers some scope to spend more.

"The industry is really focused on controlling costs, paying shareholders, efficiencies, while still expanding production,” he said. West Texas oil will remain elevated around USD80 a barrel over the next two years after hitting USD95 this year, he said.

Price discounting on Alberta crude will also shrink when the TMX pipeline expansion is finished in the second half of next year, Parsons said. That project was nationalized in part because of uncertainty over federal approvals. The industry is awaiting details on emissions regulations and a political fight is emerging, with Alberta's Premier brandishing a "sovereignty act" that may challenge federal authority.

Such questions add to uncertainty in the industry, though global demand for Alberta energy could also remain strong following conflicts in Ukraine and the Middle East.

“Global energy security has come to the forefront and nobody’s taking it for granted anymore,” he said. “It’s a fairly good position I’d say, but risks, up and down.”