Oil prices surged this week after Hamas announced that an Israeli airstrike killed Ismail Haniyeh, their political leader, in Iran. The assassination heightened geopolitical tensions in the Middle East, a region responsible for about one-third of the world’s crude oil production.
What happened
In response to the assassination, West Texas Intermediate (WTI) crude oil rose by as much as 3.8%, exceeding US$77 per barrel. The conflict’s escalation included a Hezbollah attack in the Golan Heights, controlled by Israel, which resulted in 12 deaths. It also threatened ongoing cease-fire negotiations between Israel and Hamas. Iran’s Supreme Leader Ayatollah Ali Khamenei warned of severe repercussions for Israel.
Oil prices across the board rose from the increase in political tension. Brent crude reached $80.73 per barrel, RBOB gasoline hit $2.44 per gallon, and natural gas climbed to $2.08 per thousand cubic feet. Analysts highlighted that while the assassination could drive up prices, the impact would likely be short-lived unless there are clear threats to physical oil supplies.
Furthermore, the Organization of Petroleum Exporting Countries (OPEC+) technical committee is set to meet. This would be to review member compliance with production quotas, potentially influencing future oil market strategies. This development coincides with earnings reports from major oil companies around the world.
How Canadian stocks are affected
The heightened geopolitical tensions and threats of retaliation against Israel can lead to fears of supply disruptions in the Middle East, a key oil-producing region. As global oil prices rise due to these fears, Canadian oil prices, which are often influenced by global benchmarks like Brent and WTI, increased as well.
In the short term, at least, higher oil prices can benefit the Canadian economy, particularly in oil-producing provinces like Alberta. Increased revenue from oil exports can boost provincial economies and contribute to federal revenues. However, it can also lead to higher fuel prices domestically, impacting consumers and businesses.
With global oil prices rising, investment in Canadian oil sands and other oil production projects might increase as they become more economically viable. This can lead to growth in the Canadian oil sector and increased production capacity.
One stock to buy
Several Canadian oil and gas companies are likely to benefit the most from the increase in global oil prices due to the geopolitical tensions in the Middle East. Yet above them all, Canadian Natural Resources Limited (CNRL) (TSX:CNQ) looks the most likely.
CNRL is one of the largest independent natural gas and heavy crude oil producers in Canada. The company has a diverse portfolio, including oil sands, conventional heavy oil, light oil, synthetic oil, and natural gas. The rise in oil prices boosts the profitability of these assets, especially the oil sands and heavy crude oil. These often have higher production costs but generate substantial revenue when prices are high.
Beyond the fluctuation and oil prices, CNRL has a strong track record of operational efficiency and cost management. The company continuously works on optimizing its production processes to reduce costs and improve margins. With a strong balance sheet and liquidity position, CNRL is well-positioned to take advantage of market opportunities arising from higher oil prices.
Shares are now up 2.3% after the recent news. Yet the company continues to trade at a reasonable 14.3 times earnings. Add to this a 4.2% dividend yield, and it looks like a great time to buy. We all hope for peace in the Middle East. Yet it does bring to light the importance of Canadian oil for the global economy.
