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Oil price spike could be a positive economic indicator

Fin - Balance Sheet - CA
Oil price spike could be a positive economic indicator

The price of oil is back above $100 (US) per barrel for the first time in more than a year. It's a psychological barrier that creates worry around global economic growth, but some economists remain unruffled, at least for now.

Unlike in the past, when rising prices were partially blamed for economic droughts, experts see the current boost as a potentially positive indicator and driven by different factors than at other points in history.

The price of oil closed just above $103 in New York on Friday, up 6.5 per cent for the week and it's highest close since May 2012. That move was bolstered by strong employment data out of the U.S., signaling a steady economic recovery, alongside political unrest in Egypt that threatens global supply.

“We’ve now seen a return of the oft-dreaded, triple- digit price for WTI, the U.S. benchmark, after a lull in fuel costs that gave consumers some much needed spending power,” CIBC chief economist Avery Shenfeld said in a note. “Does that represent a threat to our optimism on global growth for 2014?”

His answer: “Not likely.”

Shenfeld argues the current spike in oil prices is the result of different circumstances than in previous years, including when oil hit a record $147 in July 2008, six months after surpassing the $100-mark.

While there is unrest in the Middle East, he says supply is less of a challenge today.

“The global and North American supply picture is much less threatening than it was even a decade ago, given the development of shale oil in the U.S., and oil sands in Canada,” Shenfeld says, forecasting that $100 oil will stick around for awhile, as a result of increased demand driven largely by a steadying U.S. economy.

In fact, it’s that growth in demand, amid the economic recovery, that is supporting prices.

“If better economic activity is driving oil prices higher, it’s circular to argue that higher oil prices will then stanch activity,” Shenfeld said in his report.

Another factor behind oil’s recent rise is shrinking price gap between New York-traded West Texas Intermediate (WTI) and London-traded Brent North Sea crude. On Friday, WTI closed at $103.22 a barrel, while Brent closed at $107.72. The two haven’t traded this closely since late 2010. The spread was above $20 earlier this year.

"Some of what we've seen in recent weeks is less a rise in global oil prices than a narrowing in the spread between WTI and Brent," said Shenfeld.

The price of Canada’s Western Canada Select product has also returned to regular levels against WTI in recent months.

BMO chief economist Douglas Porter describes it as having a “serious thorn” removed from Canada’s economic outlook.

“With oil accounting for almost a 50-per-cent weight, the Bank of Canada’s commodity price index has actually strengthened so far in 2013 (up almost 5 per cent) even as most measures of global commodity prices have sagged,” Porter said in a report, arguing that’s good news for Canadian economic growth.

The outlook for Canada counsels caution, not calamity,” Porter says. “While we do look for U.S. growth to outperform Canada in the medium term … we are fundamentally bullish on the U.S., which ultimately is a big positive for Canada.”