What escalating U.S.-Iran tension means for Canadian energy

Michelle Noer climbs the steps to the world's largest dump truck at the Syncrude Aurora mine near Fort McMurray, Alberta, in this May 23, 2006 file photo. (REUTERS/Todd Korol/Files)
Michelle Noer climbs the steps to the world's largest dump truck at the Syncrude Aurora mine near Fort McMurray, Alberta, in this May 23, 2006 file photo. (REUTERS/Todd Korol/Files)

Oil prices are surging in the wake of the U.S. airstrike that killed a top Iranian general on Thursday. The attack, and Iran’s promised response, have analysts forecasting scenarios of a barrel of European benchmark crude hitting $150. 

While ongoing tension in the Middle East would likely disrupt supply, experts don’t expect Canada’s long-suffering energy sector will be in a position to take advantage of price gains. Some analysts see it as a teachable moment underscoring the country’s inability to bring its ample crude supply to global markets in a time of need. 

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“China is a major buyer of heavier crude, which is what Canada produces,” Carl Larry, the Houston-based commodities performance director at Refinitiv, told Yahoo Finance Canada. “If Iran’s oil supplies are diminished or taken out completely, China will look not just to the U.S., but to Canada, to renew its supply.”

For years, Canada’s energy industry has clamoured for ocean access via pipeline to reach buyers beyond North America. According to the Fraser Institute, insufficient pipeline capacity cost Canada’s energy sector $20.6 billion in foregone revenue in 2018. The lack of export pipelines has contributed to a drought of foreign investment in the sector.

Compared to several other oil producing regions, Canadian producers point to stronger environmental and labour standards overseen by a stable government. In other words, it would be a logical alternative source in the event of extended conflict involving the Gulf states. 

“The big problem with Canadian energy is lack of access, the lack of capacity to export the product. It really comes back to our politics and the lack of pipelines being built,” Purpose Investments’ chief investment officer Greg Taylor told Yahoo Finance Canada

He notes that Canada can’t even move oil internally in an effective way right now, with East Coast refineries relying on crude from the Middle East.  

If conflict intensifies between the U.S. and Iran, putting pressure on global supply, Larry hopes proponents of the energy sector will use the incident to show Ottawa the importance of building new energy infrastructure.    

“Canada might feel that they missed an opportunity when the U.S. started exporting oil and not importing as much. This is a second opportunity for Canada,” he said. “This could be a very decisive year for Canadian energy exports.”

Rising oil prices lifted shares of many Canadian energy companies on Friday. Bonavista Energy (BNP.TO) closed 5.17 per cent higher. MEG Energy (MEG.TO) climbed 4.22 per cent. The gains were slightly more pronounced for U.S. firms. Whiting Petroleum (WLL) added 8.58 per cent at the close, after rising as much as 15 per cent in pre-market trading. Oasis Petroleum (OAS) jumped 7.17 per cent.

Taylor said any hint of good news would go a long way.

“Energy is coming into this year as one of the most hated sectors out there. People haven’t been paying attention to stabilization in the oil price,” he said. “The sentiment around the group has been so negative in the last few years that any positive change in tone could be met with fairly aggressive price action.”

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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