More volatility expected as oil markets wait for next 'shoes to drop'

Oil prices continued to climb Monday amid rising tensions between the U.S. and Iran.

Oil prices continue climb Monday amid rising tensions between the U.S. and Iran

Oil tankers pass through the Strait of Hormuz in 2018. (Hamad I Mohammed/Reuters)

Oil markets continued to roil Monday amid fears of escalating tensions between the United States and Iran.

And observers expect further volatility, as the world watches to see what, if any, retaliation might follow a U.S. decision to kill a high-ranking Iranian military leader last week.  

"Buckle up for more price volatility," said Judith Dwarkin, chief economist with RS Energy Group in Calgary.

North America's benchmark oil price, West Texas Intermediate, climbed 22 cents on Monday to settle at $63.27 US a barrel. Brent crude, the global benchmark, rose above $70 US a barrel on Monday for the first time in more than three months.

The Brent contract for oil touched a high of $70.74 US a barrel, the highest since mid-September, when it spiked over an attack on Saudi crude-processing facilities. Monday's price later settled at $68.91 US per barrel, up 31 cents.

Mourners gather for slain Iranian military commander Qassem Soleimani, Iraqi paramilitary chief Abu Mahdi al-Muhandis and other victims of a U.S. attack in Tehran on Monday. (Atta Kenare/AFP/Getty Images)

For Canadian oil producers, a few days of higher prices may provide some short-term opportunities to help the bottom line, Dwarkin said, but she doesn't think it's enough to spur companies to alter plans.

"It's an opportunity to sell some crude at an unexpectedly higher price for a little while," she said.

However, she noted oil prices had already been experiencing some tailwinds even before last week.

For one, there was hope OPEC and its allies would follow through with deeper production cuts, at least through the first quarter of the year, she said. Some optimism also followed the U.S. decision not to hit China with more tariffs as they worked toward a Phase One trade deal.

But there were also potential risks to the market, Dwarkin noted, including concerns OPEC wouldn't follow through on its planned cuts and the U.S. might waive its sanctions on Iranian exports of crude.

"Since [last week], we have seen the likelihood that sanctions being waived on Iran as more remote than ever — and we're waiting for the other shoe, or shoes, to drop," she said.

Kevin Birn, an analyst with IHS Market in Calgary, said the impact of higher prices to Western Canadian producers is going to come down to how long they last.

There's been no physical supply disruption to oil supplies, he noted, saying the price impact so far is "psychological."

"There is a price premium to be had here for Western producers — and all global producers — because of this," he said. "The duration is the question and how that translates."

Qassem Soleimani, commander of Iran's Quds Force, was killed last week at the Baghdad airport. (Ebrahim Noroozi/The Associated Press)

The U.S. killed Iranian Maj.-Gen. Qassem Soleimani in an airstrike at the Baghdad airport on Friday, dramatically heightening tensions between Tehran and Washington.

Early Sunday, as Iran threatened to retaliate, President Donald Trump tweeted that the U.S. was prepared to strike 52 sites in the Islamic Republic if any Americans are harmed. 

Fears that Iran could strike back at oil and gas facilities important to the U.S. and its Persian Gulf allies stem from earlier attacks widely attributed to Iran.

The U.S. has blamed Iran for a wave of provocative attacks in the region, including the sabotage of oil tankers and an attack on Saudi Arabia's oil infrastructure in September that temporarily halved its production.

Iran has denied involvement in those attacks.

Jim Krane, an energy and geopolitics researcher at Rice University in Texas, said if Iran targeted oil infrastructure, it would still wreak havoc on the global economy because of the way that oil markets affect other energy-intensive industries, such as airlines, shipping and petrochemicals.

But some experts say the effect of a Middle Eastern geopolitical crisis on oil prices may not be as great as it once
was. The U.S. energy industry, for instance, can ramp up shale oil production in places such as Texas.

"We're in this new territory where the world oil markets are more dynamic and can tolerate this disruption more than they used to," said Michael Webber, a mechanical engineering professor at the University of Texas at Austin.

Roger McKnight, chief petroleum analyst with En-Pro International, believes the market response to U.S.-Iranian tensions has been "subdued," especially compared to what might have happened in the past.

"Say 10, 15 years ago, if something like this would have happened then, the sky would have actually fallen," he said.

"But when you have the largest exporter of petroleum products, being our largest customer to the south, and their ability to turn on a dime so far as shale oil production is concerned, it sort of dampens the panic … in the markets."

With files from Associated Press


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