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Varcoe: War on Iran drives up oil price, reverberates through Canadian companies, Alberta budget

Geopolitical volatility can quickly reshape global energy markets, and alter Alberta’s financial situation

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“Why did you sandbag oil at 60 bucks when it’s sitting at $98,” Nate Horner told the Calgary Chamber of Commerce audience in jest.

Much of Horner’s lunch-hour talk focused on Alberta’s $9.4-billion deficit forecast, based on benchmark U.S. oil prices averaging US$60.50 a barrel for the upcoming fiscal year.

However, the forecast may soon be out of date, highlighting how geopolitical volatility can quickly reshape global energy markets, and alter Alberta’s financial situation.

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Air strikes on Iran by U.S. and Israeli forces over the weekend, and attacks by Tehran against nearby Gulf States, have pushed global oil and LNG prices higher as markets weigh the potential disruption to energy shipped through the Strait of Hormuz.

The strait is the gateway to and from the Persian Gulf. More than 20 million barrels of oil and products transit each day through it, along with an estimated 20 per cent of liquefied natural gas supplies, according to S&P Global Energy.

Prices for West Texas Intermediate (WTI) crude, which started the year at US$57 a barrel, were already climbing in recent weeks as the potential for conflict in the region escalated. On Monday, WTI crude for April delivery jumped $4.21 a barrel, closing at $71.23.

That’s more than $10-a-barrel above Alberta’s forecast oil price for the budget year that begins April 1.

“That is out the window right now,” Al Salazar, vice-president of intelligence at energy analytics firm Enverus, said Monday.

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“This situation, it doesn’t look like it is going to end anytime soon.”

Oil market analysts and energy companies are watching to determine how the war will affect global energy markets and flows in the coming weeks.

There were reports Monday that Qatar — a major global producer of liquefied natural gas — will halt its production of LNG, that the Ras Tanura refinery in Saudi Arabia had been targeted by Iranian drone attacks and that Iran’s Revolutionary Guards had said that the Strait of Hormuz is closed.

“Oil is tightening up, and if the Strait of Hormuz gets tangled up more seriously, oil goes to 100 bucks, easy,” said Bob Geddes, president of Calgary-based Ensign Energy Services, which has drilling operations in the Middle East.

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“I say that during peace, you see oil in the $60s, the $70s — and then you get the odd blip. And here we are in the odd blip, and it’s very reserved right now, because everyone thinks the Strait of Hormuz will stay (open).”

The potential effect on prices depends on how long any supply disruption from the region continues, say analysts.

“So far, Iran’s ability to retaliate has been pretty limited,” said Robert Johnston, director of energy and natural resources policy at the University of Calgary’s School of Public Policy.

“(Markets) will remain volatile until we get some sense of what the end game is here.”

In a report, BMO Capital Markets said the war “represents the biggest challenge for the global oil market since Iraq’s invasion of Kuwait in 1990.”

If important oil facilities in the region are bombed, a spike in oil prices through $100 a barrel is probable, although a prolonged closure of the Strait of Hormuz is unlikely, the report added.

“The (price) move today is really relatively subdued on its own, but if you consider oil prices have been moving higher already, it makes a bit more sense . . . it largely just reflects the slowdown in shipments through the Strait of Hormuz,” said Randy Ollenberger of BMO Capital Markets.

Iran, a member of OPEC, produced about 3.4 million barrels per day last year.

S&P Global pointed out that on Sunday, only five oil tankers moved through the Strait of Hormuz, compared with about 60 each day.

Back in Alberta, the province’s finance minister told reporters in Lethbridge on Monday the province is monitoring the situation, pointing out that every $1-a-barrel change in WTI crude prices over the course of a year alters government energy revenues by $680 million.

“We want to have conservative forecasts,” Horner said.

“The markets are pricing the risk right now. If the strait remains closed for a long time, you’ll see that reflected in the price, but as the risk dissipates, it will quickly become a supply and demand calculation again — and that’s what led us to our forecast in the first place.”

Premier Danielle Smith said an increase in oil prices this month could reduce the expected $4.1-billion deficit projected for the outgoing budget year that ends on March 31.

The war in the Middle East is also being closely monitored by Canadian-based energy companies that operate in the region.

Ensign Energy Services has eight rigs operating in Kuwait, Bahrain and Oman, and about 800 employees in the area.

“We’ve (had) no impact to the rigs as of yet, and crews are on standby, obviously keeping an eye on things there. Some operations shut down temporarily, on standby. But other than that, we’re just waiting,” said Geddes.

“We’ve been in Venezuela for 25 years, we’ve been in the Middle East for over 25 years. So, we know how to operate in those areas.”

Calgary-based Precision Drilling Corp. also has rigs working in the region, including four in Kuwait and three in Saudi Arabia.

Each rig has about 100 people working on it, along with another 50 company support personnel based in the region, said Precision Drilling CEO Carey Ford.

“It obviously is a very serious situation . . . Our two customers there are continuing operations as usual. So all those rigs are running. All of the dependants we have, and non-essential personnel, are just sheltering in place,” Ford said in an interview.

“It’s a dynamic situation, for sure, and we’re staying on top of it every hour.”

Chris Varcoe is a Calgary Herald columnist.

cvarcoe@postmedia.com

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