A tanker sits anchored in Muscat, Oman, on Saturday.Benoit Tessier/Reuters
The stage has been set for a prolonged period of elevated energy prices as global markets for crude oil and liquefied natural gas are being reshaped by escalating conflict in the Middle East.
Before the United States and Israel launched attacks on Iran on Feb. 28, roughly one-fifth of the world’s oil and LNG passed through the Strait of Hormuz.
After fresh strikes against Iran over the weekend, including on oil facilities, there will be upward pressure on oil prices in particular as countries in the Middle East reduce production, said Michael Sambasivam, a senior analyst at Investors for Paris Compliance, a climate advocacy group based in Canada.
Uncertainty lingers over when the Strait of Hormuz, where shipping is at a virtual standstill, will become usable and stable, he said in an interview on Sunday.
Oil prices surged last week, with global benchmark Brent crude closing at US$92.69 a barrel and West Texas Intermediate at US$90.90 a barrel. Both benchmarks had been hovering closer to US$70 a barrel prior to the initial strikes on Iran.
How the closing of the Strait of Hormuz is affecting global oil markets
Oil prices could head even higher after last week’s rally, but spikes above US$100 a barrel would likely be short-lived, especially if the shipping disruptions are resolved relatively quickly, Mr. Sambasivam said.
“It’s question of how long does the price shock last,” he said. As long as the Strait of Hormuz is in turmoil, “there’s going to be elevated oil and gas prices.”
The strait, which is 33 kilometres across at its narrowest point, separates the Persian Gulf from the Gulf of Oman and the Indian Ocean, and the vast majority of energy exports from the region pass through it.
“While supply disruptions may boost profits temporarily, episodic price spikes actually structurally harm long-term demand for oil and threaten economies like Canada’s that are overly dependent on oil production,” Mr. Sambasivam added in an e-mailed statement.
During the interview on Sunday, he said the Middle East dynamics affecting oil markets are also applicable to the LNG sector.
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The United States has been the largest exporter of LNG in the world for the past three years. Eight U.S. LNG export terminals have opened since 2016, and another four are slated to be operating by 2028, including the first exports from Golden Pass LNG in Texas expected within weeks.
In sharp contrast, Shell PLC-led LNG Canada started shipping natural gas in liquid form to Asia from Kitimat, B.C., last June, when it became this country’s first export terminal for the fuel.
The U.S., Australia and Qatar were by far the world’s largest LNG exporters last year.
“Global LNG markets are expected to receive increased LNG volumes from LNG Canada,” CIBC Capital Markets said in a research note, pointing out recently reduced LNG supplies from Qatar. “The ongoing conflict in Iran is putting global LNG markets at risk of a significant supply shock.”
London-based Shell has the largest stake in LNG Canada at 40 per cent, followed by Malaysia’s state-owned Petronas (25 per cent), Japan-based Mitsubishi (15 per cent), PetroChina (15 per cent) and South Korea’s Kogas (5 per cent).
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LNG Canada’s co-owners are financial backers and also “offtake partners” – long-term buyers of LNG in Asia. “Each joint venture participant is responsible for the offtake of their proportionate share of LNG produced,” LNG Canada spokesperson Paul Hagel said in a statement.
Last September, Washington-based MidOcean Energy acquired a 20-per-cent interest in key Petronas assets in Canada, participating in natural gas operations in Northeast B.C. and the Petronas stake in LNG Canada.
“The Middle East crisis underscores that energy markets are about more than price – they are defined by reliability and security. Oil often dominates the headlines, but LNG flows are just as exposed to geopolitical risk,” according to a research note by RBC Wealth Management.
Canada recently ranked as the world’s fourth-largest oil producer and placed fifth in natural gas output.
“Canada’s oil and gas potential makes our country perhaps the most reliable supplier in the world today,” said Lisa Baiton, president of the Canadian Association of Petroleum Producers.
But climate activists say focus should be on renewable energy instead of perpetuating production of fossil fuels.