Economists and oil and gas analysts now expect drivers could be looking at a “new normal” of higher gas prices thanks to a greater risk premium for oil even after the dust settles in Iran. Photo by Peter J. Thompson /Financial Post Article content
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The federal government gave financially stretched Canadians a break at the pump a year ago after axing the much-despised carbon tax on gasoline, but those gains and then some have evaporated.
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Economists and oil and gas analysts now expect drivers could be looking at a “new normal” of higher energy prices thanks to a greater risk premium for oil even after the dust settles in Iran.
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“The new normal is not likely to be US$60 a barrel,” Avery Shenfeld, chief economist at CIBC Capital Markets, said in a podcast released on Thursday. “There’s likely to be a remaining risk premium in the energy market, but, say, somewhere between US$75 and US$80 a barrel in the course of the fourth quarter; that’s the base for our forecast.”
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Prior to the outbreak of the war, the price for a barrel of West Texas Intermediate (WTI), the North American benchmark, was about US$60 a barrel. Prices then rose nearly 70 per cent to a high of US$112.95, but have since come down to around US$90.
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Oil prices rose after Iran effectively closed the Strait of Hormuz, a major gateway for oil and gas supplies to Europe and Asia, removing an estimated 10 million barrels a day of supply from global markets, according to Oxford Economics Ltd.
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“When (the war) does come to an end, that risk premium will be higher,” Randy Ollenberger, managing director and oil and gas analyst at BMO Capital Markets, said during a web session with investors, pegging the premium at US$10 from US$5 previously.
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Oil futures were signalling to expect higher oil prices through 2026 and 2027, Scotia Capital Markets said.
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“The futures curve remains elevated at sustainably higher prices throughout 2026–27,” Derek Holt, vice-president of economics at Scotia Capital, said in a note last week, with futures pricing WTI at more than US$70 a barrel.
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Near-term prices reflect the clampdown in the Strait of Hormuz, Douglas Porter, chief economist at Bank of Montreal, said.
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“Where you get into talking about a risk premium is when you get two years from now, or maybe even a year from now,” he said, adding that the one-year future price for Brent crude, another oil benchmark, is US$80, up from US$67 just before the war began.
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But Porter said an elevated risk premium and higher prices aren’t “foregone conclusions,” though that “is the signal markets are sending to us.”
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He said the energy markets reversed themselves in several previous shocks, including the commodity supercycle when WTI prices rose to US$150 a barrel in 2008 and then crashed back down for reasons separate from what spurred the increase.
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Similarly, prices in 2014 rose above US$100 on fears that the terrorist group Islamic State of Iraq and Syria would wreak havoc across the Middle East, leading to a permanent increase in oil prices. That was not to be, either.
https://financialpost.com/news/why-canadians-suffer-new-normal-oil-prices
