Upstream Responded to War-Related Spike in Oil Prices

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Written by Daniel Graeber for IIR News Intelligence (Sugar Land, Texas)

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Summary

The Dallas Fed found higher oil prices incentivized wage increases and upstream activity. Economic concerns, however, remain across North America.

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Risk Paying Off?

A geopolitical risk premium behind the price of oil led to an uptick in drilling-related activity and payroll increases, though benefits across North America are not universal, data show.

An evolving low-intensity conflict in the Middle East has brought crude oil prices down from recent highs above $115 per barrel. The price for Brent crude oil, the global benchmark, was down about 2% in early Thursday trading to move near $95 per barrel after the U.S. House of Representatives voted to curb President Donald Trump's ability to continue waging war.

Trump avoided precedence by not addressing the constituency when joint U.S.-Israeli airstrikes in late February left much of the top Iranian leadership dead, including Supreme Leader Ali Khamenei. Industrial Info Resources has been monitoring the impacts on the global energy sector since the fighting began.

While global economic analysts continue to sound the alarm bells over the impacts of higher commodity prices, from crude oil to agricultural products, there may be some beneficial spillovers.

At the start of the year, before the start of the war, Industrial Info Resources noted that crude oil prices were stuck in a lower-for-longer cycle and energy companies were pessimistic about the future. In the refinery sector, the outlook for newbuilds was grim, though DRL Refineries and DRL Engineering last year started equipment studies for a proposed 40,000 barrel-per-day grassroot crude oil refinery for Taft, Texas. Industrial Info Resources classifies this project as having a low probability (0-69%) of moving forward as planned.

The facility could run crude oil from the Eagle Ford basin through various pipeline interconnections, something of a rarity in a U.S. refining sector tailored to run heavy crude oil slates rather than light, sweet shale oil.

And to May, a Wednesday report from the Federal Reserve Bank of Dallas found the risk premium from the war led to an increase in upstream activity in U.S shale, along with a modest uptick in payrolls. The bank said upstream trends were a clear response to higher oil prices, as well as the prospect of new pipelines coming online by the third quarter.

"Whether oil prices will remain high is uncertain, and many producers expect little to no change in production," the bank said.

Volatility Could Be a Headwind

Brent crude oil was trading in the lower $70-range in the weeks leading up to the conflict. It reached a high point of $116.73 per barrel on May 18. Across the board, IIR Energy in its weekly report on refineries and inventories found maintenance was relatively limited, though gasoline prices, one of the more ubiquitous indicators of inflation, remain elevated. Between the week of February 23 and the week of May 25, the Dallas Fed found Houston-area gasoline prices jumped 54.9%, and prices remain well above year-ago levels.

Canada

Across the border, where Canadian efforts are largely focused on diversifying trade away from the United States and establishing the nation as a global energy superpower in its own right, The Conference Board saw signs of trouble.

Metrics ranging from concerns about the cost of living to the odds of a recession are all elevated for Canadians.

"Despite economic challenges--including weak investment--the Canadian economy has remained resilient, driven by consumer spending, showing positive if soft GDP [gross domestic product[ growth, at 1.7% in 2025," the board reported.

Canada has notched a handful of trade deals that coincide with nation-building efforts steered by Prime Minister Mark Carney. Much of the nation's economy is tied closely to the energy sector, and Canada is the top crude oil exporter to the United States.

Industrial Info Resources is tracking more than 60 grassroot projects in the planning stages in the Canadian energy sector. The Bay Du Nord floating production facility off the coast of Newfoundland and Labrador is the largest in terms of investment value, backed by US$12 billion.

By the Numbers

• 60+ grassroots energy-sector projects planned in Canada
• 54.9% spike in spring gas prices in the Houston area

Key Takeaways

• Good things and bad things about high commodity prices
• North America sees higher rig counts, but economic concerns

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About Industrial Info Resources
Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, Industrial Info Resources is tracking over 250,000 current and future projects worth $30.2 trillion (USD).