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In this Jan. 22, 2014, file photo, a partially constructed gas refinery at the South Pars gas field is seen on the northern coast of the Persian Gulf in Asalouyeh, Iran.Vahid Salemi/The Associated Press

With U.S. sanctions on Iran due to kick in next month, oil markets will continue to face upward pressure on prices even as those higher energy costs cause slower growth in the global economy, the International Energy Agency said on Friday.

However, Canadian crude producers continue to miss out on the commodity price surge as both heavy and lighter grades of Western Canadian crude sell at record discounts compared with North America’s benchmark West Texas intermediate (WTI). The discount for Western Canadian select – which touched US$52 a barrel earlier in the week – was US$49.65 in trades for November delivery on Friday, according to Net Energy, a Calgary oil-trading firm. Canadian light oil – which typically sells at a slight discount to WTI – fetched US$28.50 less a barrel on Friday, Net Energy said.

WTI retreated from a midweek high of US$75 to close Friday at US$71.08, while the international benchmark North Sea Brent settled at US$79.70.

Global markets are currently well-supplied with oil, as key countries – including Saudi Arabia, Russia, the United States and Canada – are each producing near-record volumes, the Paris-based IEA said on Friday in its monthly oil market report. However, demand has also been strong, and major suppliers such as Iran and Venezuela have seen their exports fall precipitously.

As a result, there is limited ability to produce more crude quickly and that spare capacity will be squeezed even further in the coming months, the agency forecast.

“This strain could be with us for some time and it will likely be accompanied by higher prices, however much we regret them and their potential negative impact on the global economy,” the report said. The IEA pared back its demand forecast by 110,000 barrels a day (b/d) for both this year and 2019, owing to a slowing economy and higher crude prices.

IEA president Fatih Birol recently echoed calls from U.S. President Donald Trump that major producers within the Organization of Petroleum Exporting Countries (OPEC) must boost their output to keep a lid on prices.

Iran’s exports fell by 800,000 b/d in September from its recent peak of 1.6 million b/d as the Trump administration threatens to punish refineries that ignore U.S. sanctions being imposed after Washington withdrew from the nuclear-weapons agreement entered into by former U.S. president Barack Obama. When sanctions formally kick in next month, the impact will depend on the degree to which the U.S. administration grants waivers to key Iranian customers in India and elsewhere that would support exports from the OPEC heavyweight.

Canadian producers have been hit not only by bottlenecks at home, but also by a shortage of pipeline capacity in the United States, which has kept a lid on WTI. Canadian light-crude prices fell sharply this week, as inventories build in Alberta and producers scramble to secure rail capacity.

In addition to the pipeline constraints, Canadian producers have been hit by a large number of U.S. refinery customers going down for maintenance at the same time, said Rory Johnston, economist with Bank of Nova Scotia. There is more than one million b/d of refining capacity offline for maintenance, compared with 600,000 b/d at this time last year, he said. The differentials should improve somewhat when those plants are back in operation.

Calgary-based companies typically set their capital budgets for the coming year in the fall, and the current steep discounts will constrain spending in 2019, he said.

The pain is spreading from producers to the service sector, with drilling companies expecting little improvement in the coming year, said Mark Scholz, president of the Canadian Association of Oilwell Drilling Contractors. “It’s definitely not good news at a time when we’re still struggling to keep our heads above water,” he said.

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