Two domestic factors are in play
I think we're seeing some inflows into Canadian oil and gas today because of two big government announcements.
The state of play in oil is very interesting. Canadian crude is landlocked and is trading around $5 barrel right now because of problems with takeaway capacity.
It's a massive short term problem.
However in the long-term, it's starting to look much brighter. Today TC Energy sanctioned the infamous Keystone XL pipeline with the help of the Alberta government. Construction will begin right away and when it goes into service in 2023, it will be capable of carrying 830K bpd to the US Gulf coast, drastically improving the economics in Canada. The Transmountain pipeline to the Pacific ocean is also expected to come online at around the same time.
Meanwhile, US shale is imploding with few prospects for salvation.
Ultimately, the projections have proven to be wrong. Last year, almost everyone in shale lost money at $55 oil. It was already in the process of collapsing before COVID-19 and the Saudi price war. Meanwhile Canadian Natural Resources alone generated $4.6 billion in free cash flow last year.
There was a schism in 2016 between US and Canadian oil. Shale got walloped by responded by borrowing more and promising better returns at scale. Canadian producers focused on cost reduction and paying down debt.
Canadian Natural Resources now says annual operating costs are just $11.49/barrel. Moreover, oil sands are an extremely long-lived asset and don't need the kind of endless investment that shale does.
So a big part of what the market is betting on today is that Canadian oil is a bigger part of the North American picture in 2-3 years than shale, or at least there will be a big relative improvement.
Huge wage subsidy
The second domestic factor is the enormous wage subsidy the Canadian government announced yesterday. The details still aren't out but any company with a 30% revenue drop can get the government to pay 75% of the first $58,700 in wages -- or $1179 week. It will last for three months. That means Canadian workers will be getting almost as much each week as Americans will be getting in total during the outbreak.
More importantly, it's a massive boost for companies, who will only have to pay as little as 25% of employee wages. Oil giant Suncor has 13,000 employees and could save as much as $50/m a month in wages.
The cost to the government of the program figures to be stratospheric but enormously helpful for labor-intensive businesses. That's not just oil and gas but anyone who is continuing to operate.
USD weakness
Finally, the latest swing lower in USD/CAD is also due to USD weakness at the moment. Some large flows related to quarter-end are also weighing broadly on the big dollar.
