Bank of Canada sees economy bounce in 2013-14 after oil troubles

Wed Jan 23, 2013 2:08pm EST

* Oil troubles cut 0.4 point from second-half 2012 growth

* Bounce back should add 0.1 point to growth in 2013, 2014

* Smaller discount for Western Canada crude will help

* Also new pipeline, refining capacity to boost Canada

OTTAWA, Jan 23 (Reuters) - A combination of temporary disruptions in the energy patch and dramatic discounts for Western Canadian crude oil sliced off 0.4 percentage point of annualized economic growth in the second half of 2012, the Bank of Canada estimated on Wednesday.

But things are looking better for 2013-14 and beyond, it said.

"The return to normal production and the gradual narrowing of crude oil price spreads are projected to contribute 0.1 percentage point to real GDP growth in each of 2013 and 2014," the central bank said in its quarterly Monetary Policy Report.

It noted that in the second half of last year, regulatory limits and shutdowns of the main Canada-U.S. pipelines temporarily constrained crude transportation capacity. It added that outages at big U.S. refineries reduced demand for Canadian oil, while both Canadian oil sands and U.S. light oil production grew without corresponding increases in pipeline capacity.

Lower Canadian crude prices and historically low natural gas prices contributed to a fall in engineering investment, tied to a decline in drilling activity.

And in the third quarter, unplanned oil sands maintenance and outages off Newfoundland and Labrador cut crude oil output.

But things are looking brighter as the discount for Western Canada Select (WCS) from West Texas Intermediate or Brent oil declines.

"Over the next year, spreads for WCS are expected to narrow gradually as the impact of temporary disruptions dissipates, new pipeline capacity comes into service and new heavy crude oil refining capacity is added," it said.

It pointed to increased capacity this month from the Seaway Pipeline - a joint venture between Enterprise Products Partners LP and Enbridge Inc - and the completion of the TransCanada Gulf Coast project in the second half of this year. Also, refurbishment of U.S. Midwest refineries would increase the capacity for refining Canada's heavy crude, it said.

"This new transportation and refining capacity is expected to drive the narrowing of the WCS spread over the medium term," it said, adding that further rail and pipeline additions would help further in 2014.

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