The Energy Crisis 2026, Eight Months In: Why Markets Remain Tight and What It Means for Canada

Intro: 00:00
From Foyston Gordon and Payne, this is the Foyston for Thought Podcast, bringing context and perspective to the issues of shaping markets and portfolios.

Daphne King: 00:08
Welcome to episode six of the Foyston for Thought Podcast, recorded on October 15th, 2026. I’m Daphne King, Principal, Client Relationship, and Business Development Manager at Foyston, Gordon, and Payne. Today I’m joined by Zeba Mirza, Vice President and Energy Analyst. Zeba, when we spoke in June, we discussed how the disruption in the Strait of Hormuz was drawing down global oil inventories, while oil prices seem to reflect expectations of a quick resolution. We also explored the renewed focus on energy security and Canada’s advantages as a reliable supplier of oil and natural gas. With those themes in mind, what has changed most in energy markets and what has surprised you?

Zubaida Mirza: 01:00
Okay, well, thank you for having me here. So maybe just start at the beginning. What um, you know, honestly, it’s hard to imagine. It’s been eight months since the war really has been ongoing now. I think the biggest surprise, which has been, is that despite the region being at war, more oil is flowing out of the Middle East than was expected. And from all the data points which we can see, if it’s the production data from the OPEC or IEA, or if it’s US inventories, or maybe the tracking through Kpler, there is a definite increase in exports out of the Middle East in Q3. In fact, I see estimates which said that by September, Middle Eastern oil flows were back almost to 90% of where they were before the war. So keep two things in mind though. It is uneven. It goes up, it goes, and then it declines. So in July, there was a quick burst of exports out of the Middle East. And that was because when it looked like things might be wrapping up and we had a path to peace, but it didn’t really stay in place. And in August, we saw exports again say decline down. In September, again, we have seen a burst of oil exports out of the Middle East, and it’s been enabled by ship-to-ship say transfers in the Gulf of Oman and the East-West pipeline, which had been knocked out, has come back on service. The caveat I would make though is that with the recent escalation, we have hinged from the Houthis, like we don’t know how durable this recovery actually is, right? And the other thing to keep in mind is whatever increase in flows we have seen has come through oil, it hasn’t come through products. So these are the two things. So this actually has been not what most people expected.

Daphne King: 02:39
So wait a second, are you saying that with the oil is flowing again that the crisis is over?

Zubaida Mirza: 02:46
Not at all. Well, so number one, uh keep in mind is we don’t know how durable the recovery is in supply, right? Because just in the last two weeks, what we have seen is the Houthis have escalated attacks in the kingdom. Uh they have attacked the East West Pipeline, they have attracted, they have attacked airports. Just two days ago, they actually hit the headquarters of Saudi Aramco. You know, I mean, I don’t think the situation is over by any means. But there’s also two other factors which lead me to believe the crisis is not over. So, number one, freight costs have exploded. It now can cost up to 40 to $50 a barrel to ship this crude out to Asia. And you’d wonder why, right? Because all this route was available anyway. It used to move around the globe anyway before the war happened and it used to cost like a few dollars a barrel. So why has this happened? So the nuance you have to appreciate is the way we are moving the crude right now is super inefficient. So when you do a ship-to-ship say transfer, it can take up to 10 days. So there’s a lot more of the ships, that’s what they’re trying to do. Others are just trying to avoid the regions for conflict, so they take a longer route to sail around. And anything which extends the duration of the route means there’s a fewer, the number of trips it can make back and fro, right? So even though we’re moving a smaller amount of, say, crude, it takes a lot more of the tankers. And then you have to bring sanctions into play. Because about maybe 10-11% of the fleet is is uh owned by Iran, and because of the sanctions of the US, that fleet is effectively not available. So while oil may be $90 a barrel here in North America, to China, if you want to look at the delivered cost of a barrel of oil to China, that’s about $140 a barrel. So that is really high. So in and that’s almost back to what prices were in April. And that price in April reflected the fact that there was a shortage of crude availability. Now it is the cost of getting that crude so there, right? So if you’re an importer in Asia, it’s still hurting you a lot. The crisis is still there. And I cannot stress this enough inventories are super low, Daphne.

Daphne King: 05:02
This is a bit depressing to hear. So how will this um end, Zeba?

Zubaida Mirza: 05:07
Okay, so uh within the energy space, there is generally a transmission mechanism, right? And the way it works is if product is short, then basically you drive the prices of the product up. And what that means is refiners make a lot of cash. Your refining spreads are very high. So they buy a lot more of the crude and they increase utilization through refineries, so they create a lot more product, and then the shortages is alleviated, and that drives the cycle down. What is happening right now is the transmission mechanism is broken. So we are seeing structural refining constraints. Now, either it could be flows through the Strait of Hormuz, or it could be Houthi attacks on refining capacity in Saudi, or it could be Ukrainian drone attacks on Russian, say, refineries. Whatever is happening is that there is no spare capacity for refineries available. And this is what is preventing oil prices from actually exploding like higher. So usually for diesel prices for $200 a barrel, oil prices in North America would be close to $150 a barrel. But we aren’t saying that because the normal transmission mechanism is broken. And keep in mind the product market is still super, super tight. Like when you see announcements like the US trying to publicly toy with a diesel export with the ban, right? And I get that. Like who wants to go into an election with these prices at the pump? Or you hear G7 countries talking about, for instance, we’re gonna really we’re going to release additional barrels of SPR, you know things are really, really tight and strained in the system, right?

Daphne King: 06:50
And what does SPR stand?

Zubaida Mirza: 06:52
Oh, sorry, uh strategic petroleum reserve. And so the thing to keep in mind is there is no spare capacity in the system. And the IEA actually seems to think that this product shortage could stay in place till the second half of maybe next year, because it’s we need refining capacity to come back on to actually alleviate the shortage we’re trying to see. And keep in mind a lot of these things you hear about, like your um Russia is gonna put barrels in the market. Well, they don’t have any spare barrels, or you hear about the European company the countries wanting to release from strategic reserves. Well, this is the reserves they promised to release four months ago and they just haven’t. So, you know, there’s not that much spare capacity in the system. And the immediate effect we’re seeing in Canada is that crude slates, which have a higher yield for distillates or for diesel, are getting a premium price. So if you’re a Suncor or a Canadian Natural, that product, the synthetic, say crude oil, which comes out of your upgraders, is getting one hell of a good price.

Daphne King: 08:02
So, with all of this happening globally, are you starting to worry about a recession risk?

Zubaida Mirza: 08:09
Um, yeah, and I’m glad you brought it up. Uh, because at the prices they’re seeing in Asia, you’ve got to start thinking about a recession, right? I mean, and that is something we are aware of. But as I pointed out earlier, the one thing you have to keep in mind, and the only thing I know for sure, because in the energy markets, information is often there too belatedly for you to do anything. But the one thing I can see is that global inventories are super low. And inventories is effectively the buffer for any supply shock which happens, and those inventories are exhausted. So, if I could just give you a few numbers, the IEA thinks we’ve drawn about 500 close to million barrels of inventory through September. Global inventories are the lowest they’ve been since 2016. US inventories are the most apparent visible inventories in the world, right? So, and what I can see from that is that US inventories are right now about say say 20% below the 10-year average. What I know for the US SPR is it is at levels not seen since the 1980s. So effectively, what that means is that even when things are resolved, it puts a pretty solid floor under oil under prices because the system needs to refill those inventories.

Daphne King: 09:28
Okay, moving on to uh Canada, where does Canada fit in with this whole situation going on?

Zubaida Mirza: 09:35
Uh, you know what? I hate to say it, but it’s good for Canada. So right now we are doing a strategic re-examination of our relationship with the US. The one thing I would say to you, any path to strategic diversification goes right through hydrocarbon alley. And if you ever wanted to build new projects in Canada, well, the energy industry is what offers you shovel-ready projects to build. So the West Coast Oil Pipeline, it’s officially now been called the Pacific Lake Pipeline. That has actually been deemed a national interest, a project for national interest. And what that effectively means is they’ve put it on the fast track for environmental approval. One project, so one review one year, that’s that’s the promise, right? And that is a million barrel a day pipeline, and that’s not the only one. What I can also tell you is Transmountain and Enbridge, well, they’re working to add capacity and debottleneck their pipelines. South Bow, we know, is working on a prairie connector, which is the expansion of their, say, project. And just for context, just to tell you, one million barrels a day for Canada is a big, big deal. And the reason is, well, number one, it needs to be backed by new production, which is about 20% growth from the basin, but also it jump starts activity across the chain, right? So the services companies, which are going to help you with the extraction, the infrastructure companies, which help you move the product around, the steel from Ontario, which is going to help you build the pipeline, and then the people which are going to be employed to build all this up. And that’s just on the oil side. On the gas side, Shell Canada, I’m sure you saw in the papers, they’ve actually approved LNG Canada Phase 2.

Daphne King: 11:21
And remind me what LNG stands for.

Zubaida Mirza: 11:23
LNG is liquefied natural gas, right? So oil is very easy to transport. You put it on the ship, it goes out. Gas is very expensive. So the only way to make it economic is we cool it and it turns into a liquid. And you put that on the tanker. So it’s very expensive because you need to bring that gas to liquid and you need to maintain it in that home all the way across the ocean. So it is expensive. But Shell has just approved LNG Canada phase two. And phase two is going to cost them $32 billion. So that is not a small amount. Plus, what we’re seeing, so Pembina is still working on Cedar LNG. Ksi Lisim is the other, say, large that project, which is working its way through the regulatory CQ. Very likely by 2035, if everything goes on, Canada could be exporting five to six close to BCFA of gas, which is again 20% of the basin. So we have a huge opportunity in front of us. The question is, can we capitalize on it? Can we execute?

Daphne King: 12:24
So, what could this mean for the Canadian energy producers and for their cash flow and their capital allocation?

Zubaida Mirza: 12:32
Well, there’s going to be an increased call for capital. I mean, we we can’t really avoid that. So if we could step back a bit, for the last few years, the Canadian industry has been very strictly in harvest kind of, right? So the only thing managements really scared about was how to reduce their cost of break-even, how to maximize free cash flow. And then they were going to, and the only thing is they’ve used the free cash flow is either for their balance sheet or to do buybacks. A lot of these companies also they went ahead and did large-scale MA to position themselves even better. And in these last eight months, the windfall kind of cash flows they’ve done, they’ve used that to clean the balance sheet up. So we’re going into this new build cycle with very clean balance sheets for most of the upstream space. But if we are going to pull, if you’re going to pull new barrels out of the ground, it’s going to take some cash, right? So there are things which give me some comfort, which is number one, there is it’s so this is not a switch you flip. It’s going to take some time. So even if the Pacific Link Pipeline is approved next year, FID’d, which means a final investment say decision is made, it won’t come into operation till 2033. So if it’s a five-year bill, so they have time to build new projects. So it’s not going to be like there’s a rush to build everything immediately. Number two, which give what gives me some comfort is the government has offered some great incentives. So they’ve offered, you all heard about the mega productivity deduction, you’ve heard about the accelerated depreciation, which improves economics on a project. There are the royalty breaks which they offer. And most SAGD projects, in fact, all of them are now exempt from the requirements of Bill C69, which was that environmental approval thing. So it means the industry actually has the capacity and these projects will make economic sense and they can be approved at speed. Huge, expensive, cost overruns. The way they intend to backfill into production is by SAGD, say projects.

Daphne King: 14:52
What does that mean?

Zubaida Mirza: 14:53
So this is team-assisted gravity drainage, say projects, and all of these are smaller in size, so 50,000 ABD at most, right? So you’re able to build it in a small phased expansion. You design one, you build a few. So it helps you manage your costs. But we are concerned about inflation. And to be honest, the last time we had two pipelines on the go, which was just two, three years ago, we had the Coastal GasLink and the Trans Mountain expansion. We all know what the cost overruns were. Back in 07, when they were building out the oil sands, the mines first time around, we all know what the cost overruns were. So every time we talk to the companies, what we tell them is we would rather you be on cost than on time.

Daphne King: 15:42
That’s a very good point. So, what would be a closing thought you would want to leave with the investors now?

Zubaida Mirza: 15:49
So maybe think about this way. So when we look at stock prices, we’re very aware that nothing looks like it’s inexpensive anymore. And although we do think oil prices will be higher in the near term, when we do our evaluations for stocks, we are not underwriting $100 barrel oil. Long-term oil price deck, which we use, is still close to $75 to $80 a barrel. That is still the price deck which we use. But Canada offers some things which not many other people in the world do, or jurisdictions in the world do. Very few basins in the world offer the reserve life which Canada offers. Or even fewer are able to offer the kind of growth that we will offer if this diversification from the US plan, if we’re actually able to execute on it. For the first time in many, many years, we’re actually seeing foreign capital fly back to Canada. Shell and Ovintiv bought upstream assets. The likes of Apollo and KKR are buying infrastructure assets. While basins in the US are facing declining productivity, everything which is happening below the ground in Canada would sense that our performance is improving. So while declining basins, we are actually improving. And frankly, we don’t even know at the moment what kind of additional energy demand this new this new brave AI requirements in the world are going are going to impose, right? So my final, the only thing I would say to you and to our investors is this is going to be a multi-year play. So don’t sell your Canadian stocks just yet.

Daphne King: 17:28
This has been fantastic. Zeba, thank you very much for participating in Foyston for Thought podcast. And to everyone listening, thank you. We’ll be back soon with another conversation on markets and investing. Welcome, great, thank you.

Intro: 17:43
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