What Do the Latest Middle East Tensions Mean for Oil?

The latest Middle East crises could be a boon for oil and beaten-down, heavily indebted upstream oil producers Baytex Energy Corp. (TSX:BTE)(NYSE:BTE) and Pengrowth Energy Corp. (TSX:PGF)(NYSE:PGH).

| More on:
The Motley Fool

Oil has rallied strongly in recent weeks to be trading at well over US$50 per barrel and close to its highest price since March. This is particularly good news for beaten-down energy stocks — notably, for upstream producers such as Baytex Energy Corp. (TSX:BTE)(NYSE:BTE) and Pengrowth Energy Corp. (TSX:PGF)(NYSE:PGH), which budgeted for an average price of US$55 per barrel for 2017. While there is still considerable uncertainty surrounding the outlook for crude, recent geopolitical events should support higher prices for at least the foreseeable future.

Now what?

A hotbed of religious and nationalist conflict in the strife-torn Middle East never fails to deliver a veritable smorgasbord of geopolitical crises. The latest is the commencement of hostilities in Iraq between the Shiite-dominated national government and the Kurdish peshmerga after Iraqi Kurds recently voted resoundingly for independence. The conflict is centred on the city of Kirkuk, which is home to some of Iraq’s oldest oil fields and has the potential to halt 275,000 barrels of daily output.

While that volume could be considered immaterial, there were also threats from Turkey, Iran, and Iraq to block Kurdish oil exports should they obtain greater autonomy, potentially blocking 600,000 barrels of daily oil production. That would certainly be sufficient to constrain supplies and push prices higher.

Trump’s latest sabre rattling in the region has also created considerable uncertainty over Middle East oil supplies.

He recently decertified the Iran nuclear deal, which could see sanctions reinstated against Teheran. Not only did that move send a strong message of support to key regional U.S. allies Saudi Arabia and Israel, but it could also derail Teheran’s plans to boost oil production as a means of funding the modernization of the economy.

According to data from OPEC, since sanctions were lifted, Iran has expanded its oil output by roughly one million barrels daily. That has boosted government revenues, which Teheran has used to promote economic growth and further its regional interests. This growing regional influence coupled with additional oil revenues expected to boost GDP growth to as high as 9% annually triggered alarm bells across the region, notably in Saudi Arabia and Israel.

If sanctions against Iran are reinstated, it could cause its oil production to drop by up to one million barrels daily as well as remove the threat of further supply increases, because Teheran is determined to boost production to 4.5 million barrels daily by 2022. That would go a long way to rebalancing global energy markets and supporting a sustained oil rally.

So what?

While crude has pulled back in recent days, these tensions certainly have the potential to disrupt oil supplies from the Middle East, which would support higher price for at least the short term. This would be a boon for Canadian energy stocks, especially those that have considerable debt, such as Baytex and Pengrowth, which have been battling to generate sufficient cash flow to reduce their onerous debt to manageable levels.

Despite the increasingly positive outlook for crude precipitated by the latest developments in the Middle East, investors would do well to regard the current situation with caution. Those tensions only have the potential to trigger minor supply disruptions, and any sustained rebound in oil appears unlikely. The threat of a global supply glut continues to loom large because of the risk of the OPEC deal collapsing, growing U.S. production, which, for July 2017, reached its highest level since October 2015, and a lack of demand growth. That means sharply weaker oil could be here to stay for a lot longer than many pundits anticipated.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt Smith has no position in any stocks mentioned.

More on Energy Stocks

Arrowings ascending on a chalkboard
Energy Stocks

Beat the TSX With This Cash-Gushing Dividend Stock

Canadian Natural Resources stock is well set up to beat the TSX as it continues to generate strong cash flows…

Read more »

energy industry
Energy Stocks

2 TSX Energy Stocks to Buy Hand Over Fist Now

These two rallying TSX energy stocks can continue delivering robust returns to investors in the long term.

Read more »

green energy
Energy Stocks

1 Magnificent TSX Dividend Stock Down 37% to Buy and Hold Forever

This dividend stock has fallen significantly from poor results, but zoom in and there are some major improvements happening.

Read more »

oil tank at night
Energy Stocks

3 Energy Stocks Already Worth Your While

Here's why blue-chip TSX energy stocks such as Enbridge should be part of your equity portfolio in 2024.

Read more »

Solar panels and windmills
Energy Stocks

1 Beaten-Down Stock That Could Be the Best Bet in the TSX

This renewable energy stock could be one of the best buys you make this year, as the company starts to…

Read more »

Dice engraved with the words buy and sell
Energy Stocks

Is Enbridge Stock a Buy, Sell, or Hold?

Here's why Enbridge (TSX:ENB) remains a top dividend stock long-term investors may want to consider, despite current risks.

Read more »

Gas pipelines
Energy Stocks

If You Had Invested $5,000 in Enbridge Stock in 2018, This Is How Much You Would Have Today

Enbridge's high dividend yield hasn't made up for its dismal total returns.

Read more »

Bad apple with good apples
Energy Stocks

Avoid at All Costs: This Stock Is Portfolio Poison

A mid-cap stock commits to return more to shareholders, but some investors remember the suspension of dividends a few years…

Read more »