Oil prices rose this week as tightening supply conditions and ongoing tensions in the Middle East contributed to push prices higher.

West Texas Intermediate crude (WTI) is flirting with the US$85 a barrel level, having gained almost 3 per cent since last Friday. This surge comes amidst a backdrop of decreasing U.S. crude inventories and key time spreads in the market showing signs of tightening.

Escalating tensions between Israel and Iran and supply curbs enacted by OPEC+ are also supporting the upward momentum in oil prices.  These tensions pushed WTI prices above $86 a barrel earlier in the month, with Israel now intensifying preparations for a possible comprehensive war with Hezbollah.

But according to Vikas Dwivedi, global energy strategist at Macquarie Group, that upward momentum could evaporate as the year progresses. “We think it will just start to go away," he said of the risk premium that war has priced in. "And then … actual supply-demand fundamentals will start to exert themselves via surpluses in a bearish manner."

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That would be bad news for big oil producers such as Exxon Mobil Corp. and Chevron Corp., which have benefitted from the higher prices this year. The two companies have both experienced significant share price rises since January, but saw stock prices decline Friday after first-quarter earnings fell short of market expectations, despite notable production increases in key oil projects in Guyana and the Permian Basin. Exxon's shares dropped by as much as 3.6 per cent, while Chevron's shares declined by 2 per cent before rebounding slightly.

Trans Mountain start nears

A more upbeat development for Chevron is the company’s commencement of purchasing heavy oil from Canada’s newly expanded Trans Mountain pipeline for processing in its California refineries, according to a report from Bloomberg. The development suggests that the U.S. West Coast could become an important market for Canadian oilsands crude.

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Scheduled to commence commercial operations next week, the Trans Mountain expansion will alleviate some of the pricing pressures faced by Alberta’s heavy oil producers, who would otherwise face steeper discounts on their product if they were solely reliant on rail transport.

The project has faced numerous setbacks including construction delays and budget overruns, but it will ultimately end up being a tailwind for Canadian producers, said Grant Fagerheim, president and CEO of Calgary-based Whitecap Resources Inc. “This expansion of 590,000 barrels a day on the TMX is very helpful for the entire oil-producing complex in Canada.”

Whitecap Resources is yet another oilpatch company that reported quarterly results this week, alongside oil services provider Precision Drilling Corp., both of which are poised to be major beneficiaries of the expanded TMX. “The business in Canada right now is trending very, very good with the Trans Mountain pipeline [expansion] coming on,” said Kevin Neveu, Precision Drilling’s president and CEO.