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After years of glut, global oil markets now face supply constraints that are providing welcomed revenue gains for Canadian producers, but also higher pump prices for summer motorists.

North America’s benchmark West Texas intermediate (WTI) jumped nearly 10 per cent last week to US$74.29 a barrel – a level not seen since November, 2014 – as traders fretted over the continuing emergency shutdown at Alberta’s Syncrude Canada Ltd. and prospects for lower exports from members of the Organization of the Petroleum Exporting Countries (OPEC) Iran, Libya and Venezuela.

Those gains were pared slightly on Monday, with WTI closing at US$73.94 a barrel following pressure from U.S. President Donald Trump on Saudi Arabia to increase output.

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Many of the factors propelling global oprices higher are either short-term or political in nature, and are hard to count on for the long term.

Reuters

While the higher prices would be a much-needed tonic – if sustained – for Calgary’s oil companies, consumers are feeling the pain at the pumps as the summer holiday season gets under way.

Gasoline prices sat at close to four-year highs, averaging $1.378 a litre across the country heading into the Canada Day weekend on Friday. That’s up from $1.084 cents a litre on the same date last year, and the highest level at the end of June since 2014.

However, many of the factors propelling prices higher are either short-term or political in nature, and are hard to count on for the long term.

Syncrude’s 350,000-barrels-per-day operation is expected to be back online by the end of July, which would remove some of the fuel for the WTI rally. Meanwhile, analysts worry about a supply squeeze as the U.S. administration pressures global importers to end their purchases of Iranian oil while Venezuela’s production slumps with the South American country’s deepening crisis.

As a result, the recent announcement from Saudi Arabia and Russia that they would boost production by one million barrels a day failed to allay concerns that the oversupply of crude that plagued the industry for several years is rapidly turning into a shortfall.

U.S. President Donald Trump tweeted on Saturday that Saudi Arabian King Salman bin Abdulaziz Al Saud had agreed to pump more oil, “maybe up to 2,000,000 barrels.” The White House later walked back the comments.

Canadian oil producers are reaping the benefits, and their share prices are climbing. The S&P/TSX Capped Energy Index – which comprises 37 companies – posted a 15-per-cent gain in the quarter that ended on Friday.

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“Companies’ realized prices are going up,” said Phil Skolnick, manager of equity research at Toronto’s Eight Capital Corp. “For sure, they’re benefiting, and we should see some better numbers in [the second quarter] than in [the first]. And if things remain the way they are, the second half [of 2018] should look that much better.”

Adding to energy companies’ wary sense that a corner has been turned was the approval in Minnesota last week of Enbridge Inc.’s Line 3 pipeline expansion and the federal government’s determination to complete the Trans Mountain pipeline expansion project.

Pipeline constraints are not only bedeviling Canadian-based companies, but are constraining production growth in the United States, particularly in West Texas’s booming Permian Basin. As a result, U.S. supply growth is expected to level off at around 10.5 million barrels a day in the second half of 2018 and 2019, until new infrastructure can be built.

U.S. production has been growing rapidly in recent years, and helped offset the loss of Iranian crude to the market when former U.S. president Barack Obama applied sanctions in 2010 to secure a deal to constrain the country’s nuclear-arms program. The sanctions were lifted in 2015.

Now, Mr. Trump has pulled out of that Obama-era agreement and is aggressively reapplying sanctions. Washington is threatening any foreign company that purchases crude from Iran will not have access to the American financial system, and will face other sanctions as well.

Iran currently exports 2.5 million barrels a day, and its inability to market its crude would require other countries to increase their production. As a result of the previous sanctions regime, Iranian exports fell by one million barrels a day. The Trump administration is aiming for a far greater reduction that could reach two million barrels, noted Helima Croft, managing director at RBC Capital Markets in New York.

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To make up for that loss, Saudi Arabia will have to produce more than 11 million barrels a day, and it is not clear the kingdom has the capacity to boost production to that level, Ms. Croft said.

At the same time, Venezuela’s production has fallen by nearly one million barrels a day, and Libya is undergoing another political crisis that could cut its exports by up to 400,000 barrels a day.

“The hole is only going to get bigger, and we don’t see who is going to fill the gap,” she said.

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