Check the stock of almost any major Western Canadian energy or resource producer and you’ll see a familiar trajectory: up.
Since the beginning of 2021, the stocks of these companies have been rising, along with the price of the commodities they produce, resulting in strong and even record-breaking profits.
High commodity prices are more of a driver of inflation than a result of it. All basic industrial inputs are in high demand, thanks to global economic recovery and underinvestment in production, leading to what some predict is the start of a commodities supercycle – although the impacts of the Omicron variant could stall recovering economies and take the wind of commodities’ sails.
Oil prices in particular are fuelling consumer goods inflation, while high lumber prices are inflating new home construction costs.
North American natural gas prices have spiked from US$2.75 per gigajoule one year ago to as high as US$5.86 and are currently around US$4.24 per gigajoule. Canadian natural gas prices have generally followed a similar price trend.
As a result, the BC Utilities Commission recently approved FortisBC’s application to hike natural gas rates by 3.46%, effective January 1, which comes atop a 9% increase in October 2021. In Canada, gasoline prices accounted for more than 1% of Canada’s 4.7% rise in the consumer price index (CPI) in November. When gasoline is excluded, the CPI was 3.6%.
Gasoline prices are up 43.6%, year over year, compared with food, which is up 4.4%, and furniture, which is up 8.7%.
The current high inflation rates in Canada, the U.S., Europe and elsewhere are the result of a global pandemic, which shocked supply chains and flooded economies with cash through low interest rates, quantitative easing and government aid to consumers and businesses.
Once kinks in supply chains have been worked out and central banks raise interest rates, inflation should, theoretically, begin to cool.
Bryan Yu, chief economist for Central 1 Credit Union, expects inflation should ease by 2022’s second half and move closer to 2.5%.”
However, one inflation driver – high oil prices – could last well into 2022 and possibly 2023.
It’s estimated that the U.S. is short by more than one million barrels of oil compared with pre-pandemic levels. Some oil companies appear to be choosing to reward shareholders first with dividends, rather spending profits to drill new wells.
“The oil producers and the shale producers in the states have learned their lesson from 2014, when the crash started,” said Adam Pankratz, a professor of business economics at the University of British Columbia’s Sauder School of Business. “So they’re not drilling as much, and they’re focusing more on capital discipline and returning money to shareholders.”
West Texas Intermediate (WTI) was more than US$80 per barrel as of January 11, and Western Canadian Select (WCS) was at US$65 per barrel compared with US$40.86 per barrel one year ago.
Gasoline prices have consequently been rising everywhere – particularly in B.C. and could continue rising well into 2022.
Goldman Sachs in December predicted Brent Crude, a global benchmark, would hit US$85 per barrel in 2022’s first quarter , and as of January 11, it was already nearly US$84 per barrel. Goldman Sachs also said Brent Crude could hit US$100 per barrel in 2023, depending on a host of geopolitical factors.
Dan McTeague, president of Canadians for Affordable Energy, predicts gasoline prices could hit $1.85 per litre in Vancouver by the May long weekend, due to rising oil prices.
That’s bad news for consumers and businesses, because all the products they buy move by truck, plane, ship or rail and are therefore affected by gasoline, diesel and jet fuel prices.
But it’s good news for Canada’s beleaguered oil and gas producers and their shareholders. According to Statistics Canada, the value of Canadian oil exports has soared from a five-year low of $1.6 billion in May 2020 to $8.5 billion in December 2021.
Parkland Corp. (TSX:PKI), which owns the refinery in Burnaby, reported “the strongest quarterly and year-to-date results in Parkland’s history” – with earnings of $1 billion in 2021’s first nine months.
Tourmaline Oil (TSX:TOU), a major natural gas producer and a big player in the B.C. Montney formation, reported income of $1 billion for 2021’s first nine months compared with a $12.5 million loss in the same period of 2020.
Alberta oil producer Canadian Natural Resources Ltd. (TSX:CNQ) reported $5 billion in net earnings for the first nine months of 2021 compared with a $1 billion loss in 2020.
B.C.’s miners are also benefiting from high commodity prices.
“Clearly, strong global commodity prices and the rise we’ve seen are obviously a good thing for mines in B.C.,” Michael Goehring, CEO of the Mining Association of BC.
Copper, metallurgical coal, gold and silver are the chief commodities produced by B.C.’s mining sector. Teck Resources (TSX:TECK.B) produces copper, zinc, metallurgical coal and oil (bitumen from its 21% share of the Fort Hills oilsands project).
The company reported a record $2.1 billion in earnings in its third-quarter financials, based on strong commodity prices, and profits of $1 billion – a seven-fold increase over Q3 2020.
Compared with the same period in 2020, copper prices were up 44% (to US$4.25 per pound from US$2.96), zinc was up 28% (to US$1.36 per pound from US$1.06), oil up 85% (to US$61.10 per barrel from US$33.10) and steel-making coal was up 132% (to US$237 per tonne from US$102).
As for lumber producers, despite prices dropping from record highs set in the summer of 2021 and the major challenges facing the industry in B.C., forestry majors reported healthy profits in 2021.
Canfor (TSX:CFP) reported net income of $1.4 billion for 2021’s first nine months compared with $234 million in the same period of 2020.
“Despite a number of challenges, the third quarter of 2021 was one of West Fraser’s strongest quarters ever,” said Ray Ferris, CEO of West Fraser Timber (TSX:WFG).
West Fraser reported earnings of $3.5 billion for the first nine months of 2021 compared with $436 million for the same period of 2020.
It should be noted that companies like Canfor and West Fraser are now geographically diversified, so even if their B.C. operations are becoming less profitable, their operations elsewhere may still be providing strong returns.
If there is an upside to inflation, it’s that governments will enjoy tax and royalty windfalls from Canadian miners, forestry companies and oil and gas producers.
“A provincial economy will benefit from the higher revenue that’s being generated through taxes and royalties and the like,” Yu said. “That doesn’t necessarily drive investment in the economy. In an area like … the lumber sector, the longer term impacts of the pine beetle and availability of timber, those are going to be the dominant drivers of whether investment’s coming.” •
