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Loonie's Prominent Stature In Oil/Gas Industry Cuts Both Ways

A sustained recovery is beginning for Canadian natural gas exports, trade records kept by the National Energy Board (NEB) confirm. Volume and revenue gains that started around Christmas continued through the heating season, shows the NEB's latest report on pipeline traffic across the Canada-U.S. border.

February deliveries rose 5.7% to 335.9 Bcf from 317.8 Bcf a year earlier. In U.S. dollars, average prices climbed 14.2% to US$8.35/MMBtu. Monthly sales revenue rose 20.6% to US$2.8 billion.

Even when measured in Canadian dollars, gains were made despite the steep climb in the value of the loonie (named after the bird on the national $1 coin) against the U.S. dollar. In Canadian dollars the February average border price was down 2.5% to $7.78 per gigajoule (GJ). But the slippage owed to exchange rates was overcome by sales volume growth. February gas export revenues were up 2.9% to C$2.8 billion from C$2.7 billion a year earlier.

For the first four months of the gas trade year Nov. 1 through Oct. 31, Canadian 2007-2008 pipeline deliveries were up 10.6% to 1.375 Tcf from 1.243 Tcf for the same period of 2006-2007.

In U.S. dollars, Canadian gas export prices rose 8.3% to US$7.67/MMBtu for the first four months of the current contract year from US$7.08/MMBtu in the same period of 2006-2007. Revenues jumped 19.6% to US$10.59 billion from US$8.85 billion.

In the exporting country's currency, the border price for November through February averaged C$7.12/GJ, down 6.9% from C$7.66/GJ for the same period of 2006-2007. But the pipeline delivery volume gain increased revenues by 2.8% to C$10.55 billion in the first four months of the current contract year from C$10.26 billion in the same period of 2006-2007.

The days of negative exchange rate movements undermining Canadian exports are numbered, added a new forecast by Export Development Canada (EDC), a federal international trade credit agency.

The loonie's stature on global currency exchanges as a petrodollar -- owed to Canada's position as a large net exporter of both oil and natural gas -- cuts both ways, EDC Chief Economist Peter Hall told forecast briefings in Edmonton and Calgary. Exuberant financial speculators are headed for a lesson in economic gravity, the agency said.

EDC sides with wary Alberta industry and provincial budget planners in betting current oil paper-barrel highs on fevered commodity futures exchanges have little staying power.

As oil shot up to a repeated record daily trading closes beyond US$121.84/bbl in New York, Hall stuck to an EDC forecast that prices will fall by 44% to average $68/bbl next year. The agency also predicts the loonie will sink to US$0.89, using a formula derived from recent commodity trading and exchange rate relationships that says Canada's petrodollar loses US$0.03 when oil drops to US$10.

The EDC forecast does not necessarily indicate the agency believes the U.S. financial scene and overall economy will stage a comeback anytime soon. The Canadian agency sees the current oil pricing structure collapsing from its own weight.

"Money is desperately trying to find a place where it can still get a return," Hall said in describing oil's current global use as a financial asset akin to gold, diamonds or rare art. "There is intense speculation. We have a term for that in economics. It's called a bubble."

"The risk is squarely on the down side," he said. "We're at a dangerous point in the world business cycle. Risks are elevated. They are about as elevated as they ever get." EDC is only a sober voice in the wilderness by recent standards of bullishness set by predictions such as a Goldman Sachs Group forecast of US$200/bbl oil, Hall suggested.

"It's amazing how short our memories can be in an environment like this," he said. It should be easier than it seems to recover a realistic perspective, he suggested. "We only have to go back a year and a half."

Oil retreated to US$50 a barrel in early 2007 and the Organization of Petroleum Exporting Countries discussed potential actions to establish a floor of US$40/bbl, Hall recalled.

EDC expects natural gas to hang in at or near its current levels because it never quite attained the risky stature of a financial asset that has been driving up oil. The agency's forecast expects a 2008 annual average gas price of US$7.60/MMBtu, followed by US$7.40/MMBtu in 2009.

It is impossible to predict when the oil table will turn or what will make the change happen, Hall said. "You never know. A bubble is such a fragile thing that it doesn't take much. It could be a puff of economic wind, the prick of a financial needle or the intense fragility of the bubble itself," he said. "It's equally vulnerable at all points. It's about as fragile a situation as you can conceive."

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