Canada and Oil: More Complicated than One Might Suspect

It seems clear. Canada is one of the few developed countries that is a net exporter of oil. Oil prices have soared and the Canadian dollar is at its best level against the US dollar since late 2007. But a closer look suggests a more complicated picture. Since February 15, oil prices have shot up by around 25%, while the Canadian dollar has rallied just shy of 2%, and is actually among the under-performers among the major currencies (3rd worst among the G10, better only than the New Zealand dollar (-1.8% ahead of an anticipated rate cut later this week) and sterling (+0.8%).

We have found that the correlation between oil and the Canadian dollar has collapsed. We conduct the correlation analysis on a 60-day rolling basis, using percent change. The correlation peaked at the end of last year near 0.76. It now stands at -0.1.

This is the first time the correlation is inverse since the July-Oct 2007 period. In the 1992-2002 period, the correlation was often inverse, but in recent years this is an exception.

There are several considerations here. First, traditionally Canada's energy exports were concentrated in natural gas and the price of natural gas has collapsed. Second, while Canada is a net exporter of oil, the situation is more complicated. Western oil fields export heavy crude to the US, but Eastern provinces import light sweet crude. The latest data we were able to find was for 2009 and in that year Canada exported 658 mln barrels of oil to the US, but imported 313 mln barrel of oil (mostly from UK and Norway, but also Algeria).

Third, another way to conceptualize the issue is to put revenue of the oil exports in a larger context. Using round numbers to illustrate the point. Canada exports to the US about $6 bln of oil a month. The BIS survey of foreign exchange turnover found that the Canadian dollar has about a 5.3% market share (on a 200% calculation to represent there are two sides to all trades), That puts the average daily volume of the Canadian dollar near $100 bln.

The key take-aways are:

1. The correlation between the Canadian dollar and crude oil has broken down dramatically in recent weeks.

2. Canada is a net exporter of oil, but not nearly as much as it may appear as the eastern part of the country that is home to most of the population and industry is a substantial importer of oil

3. The dollar value of oil exports is a minuscule fraction of the overall turnover of the Canadian dollar in the foreign exchange market. Capital flows are more important than trade flows.