National Post (National Edition)
All eyes on the Middle East as oil prices rise
Analysts see potential for US$100/bbl
After reaching its highest price since October, oil could rise even further and possibly breach the US$100 mark this year if tensions in the Middle East continue to escalate, analysts say.
West Texas Intermediate crude was trading for between US$85 and US$90 per barrel late last week ahead of Iran's attack on Israel. Following the attack, economists from Moody's Analytics Inc. said they expect the price to increase to between US$90 and US$95 per barrel. The analysts noted two possible scenarios from here on.
“The most likely is a measured and restrained response from Israel that de-escalates tensions. That would see the $10-per-barrel risk premium fade over the next few weeks,” the economists said in a note on Monday. “The second, and far more damaging, scenario would see an escalation in the conflict as Israel forcefully responds to the attack. Were that to occur, oil prices could jump to more than $100 per barrel.”
Bank of Nova Scotia analysts said the conflict's latest escalation has changed the rules of engagement in the region to become much more dangerous.
“The higher risk premium in the oil market will be here to stay for the foreseeable future,” they said in a note. “Our current 2024 and 2025 oil price forecast may prove to be too conservative and require upward revisions.”
Higher oil prices can have a double impact on the economy. They can turn out to be a boon for Canadian oil producers, primarily in Alberta, who went through a weak 2023. But they could also mean higher costs for consumers and indirectly influence the Bank of Canada's decision to cut interest rates.
Rising oil prices would make the “job of central banks” around the world “even harder,” Moody's report said. “Depending on how long prices stay elevated, rate hikes could even come back into play.”
It added that the situation could be worse for Asian nations, where disinflation has already stalled, so any further oil price hikes could exacerbate the situation.
In early April, some economists said rising oil prices could concern the Bank of Canada as it tries to figure out the right time to cut interest rates.
Aside from the rising tensions in the Middle East, oil production cuts by the Organization of Petroleum Exporting Countries (OPEC) and resilience from major economies are two of the other reasons behind oil's rising price.
OPEC has removed about six billion barrels a day since introducing cuts in 2022, and economists are watching to see if it decides to extend the cuts to the third or fourth quarter.
At the same time, though, the International Energy Agency said the demand for oil lost momentum in the first quarter due to the postCOVID-19 rebound being “largely complete” and an expanding electric-vehicle fleet. It expects growth in 2024 and 2025 to slow to 1.2 million barrels per day and 1.1 million per day, respectively.
“Sustained output curbs by the OPEC+ alliance mean that non-OPEC+ producers, led by the Americas, will continue to drive world oil supply growth through 2025,” the IEA's report released on April 12 said. “Additional volumes from the United States, Brazil, Guyana and Canada alone could come close to meeting world oil demand growth for this year and next.”