Forced Production Cuts Across the Gulf

According to Wall Street Journal, the United Arab Emirates and Kuwait had begun to curb oil production as the closure of the Strait of Hormuz affects the flow of supplies and fills storage facilities. Abu Dhabi National Oil Co. said it is managing offshore production levels to deal with storage requirements. Kuwait Petroleum Corp. also cut output at oil fields and refineries after Iranian threats against safe passage through Hormuz.

Kuwait started to reduce output by some 100,000 barrels per day early Saturday. The reduction is nearly triple on Sunday. This implies that cuts may be up to around 300,000 barrels per day or higher depending on storage levels and the situation around Hormuz.

Kuwait produced about 2.57 million barrels per day in January and relies completely on the Strait of Hormuz for exports. This is a heavy dependence that makes the country vulnerable as there are not many alternative routes from where shipments can come.

The UAE is in a better position but is still facing pressure. The country produced more than 3.5 million barrels per day in January as OPEC’s third largest producer. It is able to bypass Hormuz via a 1.5 million barrel per day pipeline to Fujairah on the western coast and also take advantage of international storage facilities.

Disruptions are spreading in the region. Iraq has begun to withhold production for storage tank saturation. Saudi Arabia shut its largest refinery and Qatar closed the world’s largest liquefied natural gas export plant after drone attacks. Saudi Arabia has diversified some of its crude exports to Yanbu on the Red Sea but this route is not capable of completely replacing exports that usually pass through the Strait of Hormuz.

Inflation Risks Rise as Oil Shock Hits the Global Economy

The current supply shock is already having an impact on consumers all over the world. Asian refiners are beginning to report shortages as shipments from the Gulf slow down. When there are fewer cargoes available to the market, refiners must scale down operations or seek out other supplies. This situation makes energy more expensive not only for businesses but also for households.

Strong Economic Growth Increases Inflation Pressure

At the same time, the global economy is still showing signs of growth. This causes inflationary effect of higher oil prices to be stronger as energy demand is still firm. The ISM Manufacturing PMI is 52.4% which signifies mild expansion of industrial sector.

Economists and oil market analysts have hiked their oil price forecasts for 2026 amid rising geopolitical tensions and heightened war premium due to the U.S.-Iran standoff. 

Both crude oil benchmarks are now expected to average above $60 per barrel this year, with price forecasts higher by about $1.50 per barrel compared to a month ago, the monthly Reuters poll showed on Friday. 

Despite ongoing concerns about an oversupplied market, the 34 analysts and economists surveyed by Reuters in February raised their projections in view of uncertainties in how the Iran crisis would unfold in the coming weeks and months. 

In the February poll, Brent Crude prices are expected to average $63.85 per barrel in 2026. This month’s estimate is higher compared to the January forecast of $62.02.

The analysts in the poll expect the U.S. benchmark, WTI Crude, to average above $60 per barrel this year, too—at $60.38 a barrel, up from $58.72 expected in January.    

Year to date, Brent price have averaged $70.48 per barrel and WTI – $65.01 a barrel. 

Early on Friday, both benchmarks were trading 3% higher, with Brent near $73 and WTI at $67, after the United States and Iran adjourned the Thursday talks with plans for another round of negotiations next week.  

Oman’s Foreign Minister, Badr Albusaidi, who was mediating the indirect talks in Geneva, said the parties had made “significant progress” in the nuclear talks. Next week, negotiations are set to be held in Vienna, Austria.   

It is the ongoing U.S.-Iran standoff that has been the main driver of oil analysts in the Reuters poll to raise their oil price forecasts for this year. 

Currently, the geopolitical risk premium already baked in the price of oil is about $4-$10 per barrel, analysts say.  

The war premium, the OPEC+ supply policy, and the fundamentals in supply-demand balances will steer the direction of oil prices this year, they note.  

By Michael Kern for Oilprice.com    

More Top Reads From Oilprice.com

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As conflict continues in the Middle East, soaring oil prices have left many wondering what’s next for Alberta’s resource-heavy economy.

West Texas Intermediate (WTI) crude, the benchmark for oil prices in North America, rose above $90 Friday morning and ended the day at just over $91 — a dramatic increase from before the U.S. and Israel launched an attack on Iran last weekend.

ATB Financial’s chief economist Mark Parsons says those prices could lead to short-term revenue increases in Alberta, but the longer term impact remains to be seen.

“I don’t think producers are going to suddenly change their budgets based on what’s happened in the last week,” he said. “We need to see this continue for a little bit longer.”

The province is operating on a $4.1-billion deficit in the current fiscal year, while Budget 2026 forecasts a $9.4-billion deficit for the fiscal year ahead. 

The latest budget, which covers the fiscal year beginning this April, forecasts WTI crude at $60.50 US per barrel, while the current fiscal year ending on March 31 was based on an average of $61.50.

“The province is relying on a very volatile revenue base, and it can easily go the other way,” Parson said.

“The question for the Alberta government is how much can they bank on this revenue to meet ongoing spending needs caused by population growth like schools, hospitals, road infrastructure. So that problem hasn’t gone away.”

Speaking to reporters Friday, Minister of Transportation and Economic Corridors Devin Dreeshen said “we’ll see what happens” when asked what oil prices could mean for Budget 2026 and projects going forward.

“Obviously, from a budgeting standpoint, it does have to extend throughout the entire year to make a big difference,” he said, not addressing any specific projects.

Parsons said the higher oil prices would lead to “an uplift in revenues in the energy producing provinces of Alberta, Saskatchewan, Newfoundland. In the provinces that don’t produce energy, it’s mostly higher costs … what you’re going to see is uneven impacts across the country.”

The price of Western Canadian Select, Canadian oil traded at a discount to WTI, could also benefit due to a potential shortage of heavy crude coming from the Middle East, Parsons said.

How high could oil go? 

It’s unclear how much higher crude prices could get, but some experts have bold projections: oil market analyst Rory Johnston took to social media Friday to forecast WTI prices reaching upwards of $200 US per barrel unless traffic through the Strait of Hormuz resumes.

The strait is a narrow passage between Iran and Oman through which one-fifth of the world’s crude oil travels. Oil tanker traffic there has plummeted since the conflict began.

WATCH | What’s happening around the Strait of Hormuz as conflict escalates?

What’s happening around the Strait of Hormuz as conflict escalates?

CBC’s senior business correspondent Peter Armstrong explains what’s happening around the critical shipping lanes in the Strait of Hormuz on Monday as conflict escalates following U.S. and Israeli attacks on Iran.

The $200 prediction seems “a bit high” to Tristan Goodman, president of the Explorers and Producers Association of Canada, but he says he could see prices cross the $100 mark if current trends continue.

“It really depends on the situation on the ground and what’s been taken offline,” he said. “It’s not just about [passage through the Strait of Hormuz], it’s a matter of what oil facilities and oil production is still online within the region.”

Goodman said “it’s quite surprising how quickly producers can bring that production back online, which is a beneficiary to maintain price stability.”

That stability is crucial in a situation evolving this rapidly, he said.

“I think you’re probably going to see higher prices going forward, regardless of what happens within that area,” he said. “Even if stability starts to come back, and there’s resolution to this conflict — which actually doesn’t look like that’s going to be the case right away here — you’ll still see some high prices.”

WATCH | Could Canada fill the Iran war oil supply gaps?

Could Canada fill the Iran war oil supply gaps?

With the Iran war threatening to upend much of the world’s oil and gas supply from Gulf states, experts say there could be a big uptick in demand for Canadian energy products, but Canada’s limited ability to get the products to market could be an obstacle.

Soaring prices aren’t necessarily a good thing for producers in the industry, especially when they change so dramatically and come with such unpredictability, Goodman said.

“It always sounds great to have really high prices, but actually even the producers don’t want that, because then you start to have negative impacts across the economic system,” he said.

“Once you get [oil prices] above $100 … it’s positive in one sense, from the short-term, from a profit perspective, but it’s not necessarily giving the stability you need within your product.”

Gas prices averaged 144.3 cents per litre across Canada on Friday, according to CAA National — a significant increase from 127.6 cents per litre last month. 

Goodman and Parsons say the situation could lead to increased investor confidence in Canada, but that more certainty is needed domestically.

“I think investors are going to be looking at Canada as a pretty safe place to put their money. The question is: can we build the pipelines, the market access that’s needed to increase our production?” Parsons said.

Gold (XAU/USD) came under heavy bearish pressure and registered weekly losses even after opening with a bullish gap on news of the United States (US) and Israel carrying out a joint attack against Iran on February 28. In the near term, investors will assess inflation data from the US and pay close attention to fresh developments surrounding the Middle East crisis.

Gold fails to benefit from escalating geopolitical tensions

Gold touched its highest level since January 30, above $5,400, at the start of the week, but reversed its direction as the persistent US Dollar (USD) strength didn’t allow XAU/USD to capitalize on safe-haven flows. Still, the yellow metal managed to close in positive territory on Monday.

On February 28, the US and Israel launched a coordinated attack on Iran, killing Iranian Supreme Leader Ayatollah Ali Khamenei and up to 40 top Iranian officials. In response, Iran targeted US assets across the Gulf and Hezbollah also announced that it launched strikes on Israeli missile defense sites.

While markets remained risk-averse, with the chaos in the Middle East spreading, surging Oil prices revived fears over inflation rising again in the US. The barrel of West Texas Intermediate (WTI) rose more than 25% on a weekly basis as the naval activity in the Strait of Hormuz came to a halt, and touched its highest level since April 2024, above $87. Additionally, macroeconomic data releases from the US came in better than expected.

In turn, market participants reassessed the Federal Reserve (Fed) policy outlook and started to price in a further delay to the continuation of monetary policy easing. The USD gathered strength as a result and caused XAU/USD to turn south. The US Dollar Index, which tracks the USD’s performance against a basket of six major currencies, advanced to its highest level since November, above 99.00. The CME Group FedWatch Tool showed that the probability of three consecutive policy holds, in March, April and June, climbed to about 70% early Friday from nearly 40% before the US-Iran war started.

The Institute for Supply Management (ISM) reported on Monday that the Manufacturing Purchasing Managers’ Index (PMI) remained in the expansion territory above 50 in February, while the inflation component of the survey, the Prices Paid Index, jumped to 70.5 from 59 in January. On Wednesday, February’s ISM Services PMI improved to 56.1, from 53.8 in January, and Automatic Data Processing (ADP) announced that Employment Change for February was 63K, surpassing the market expectation of 50K.

Scotiabank strategists Shaun Osborne and Eric Theoret note that a 25 basis points Fed rate cut is not fully priced until September, “reflecting a material softening of expectations for easing as a result of both stronger data and the US/Iran conflict.”

“The latest ISMs have been impressive, with both manufacturing and services showing a material improvement in sentiment and suggest a material re-acceleration in US economic activity,” they add.

The US Bureau of Labor Statistics reported on Friday that Nonfarm Payrolls declined by 92K in February, missing the market expectation for an increase of 59K by a wide margin. Moreover, the Unemployment Rate edged higher to 4.4% from 4.3%. As the CME Group FedWatch Tool’s probability of three consecutive Fed policy holds declined to 60% after this data, Gold managed to keep its footing heading into the weekend.

Gold traders will remain focused on US-Iran war

The US economic calendar will feature the Consumer Price Index (CPI) data for February on Wednesday and the Personal Consumption Expenditures (PCE) Price Index data for January on Friday. These releases could trigger a market reaction, but it’s likely to remain short-lived. A stronger-than-forecast increase in the monthly core CPI and core PCE Price Index could support the USD, while soft prints could have the opposite effect on the currency’s performance and help XAU/USD rebound.

Investors will pay close attention to the developments in the Middle East and changes in crude Oil prices.

US Interior Secretary Doug Burgum said that the Trump administration is weighing a range of options for addressing the spike in Oil and gasoline prices amid the war in Iran, Bloomberg reported on Friday. In case there is a sharp correction in prices, be it via additional security measures in the Strait of Hormuz to reinstate the naval activity or an intervention by the Trump administration, the impact on inflation could remain limited. In this scenario, investors could reassess the probability of a Fed rate cut in June, opening the door to a reactive selloff in the USD and driving XAU/USD higher.

Conversely, a deepening conflict in the Middle East and a leg higher in Oil prices could be beneficial for the USD and cause XAU/USD to stay on the back foot.

Still, it might be risky to bet against Gold, given the precious metal’s safe-haven appeal. Although markets seem to be focusing more on energy prices and possible changes in the Fed’s policy outlook, the narrative could shift toward a stagflation risk in the US if markets grow worried about a prolonged conflict. In this case, Gold could reclaim the title of the preferred safe-haven asset from the USD.

Gold technical analysis: Bullish momentum fades away

The Relative Strength Index (RSI) on the daily chart declines toward 50 and Gold fluctuates at around the 20-day Simple Moving Average (SMA), reflecting a loss of bullish momentum in the near term.

The Fibonacci 23.6% retracement of the November-February uptrend and the 20-day SMA form a pivot area at $5,090-$5,100. In case Gold stays below this region and confirms it as resistance, technical sellers could remain interested. On the downside, $4,875-$4,865 (Fibonacci 38.2% retracement, 50-day SMA) could be seen as the next important support area before $4,695-$4,700, where the ascending trend line and the Fibonacci 50% retracement level meet.

Looking north, an interim resistance level seems to have formed at $5,200 (static level) before $5,400 (static level) round level and $5,598 (all-time high).