For Canadian and North American refineries, the Iran war oil shock has hit like a hurricane. A growing shortfall in crude supply from the Middle East has sent prices skyrocketing, pushing jet fuel margins to levels not seen since Hurricanes Katrina and Rita knocked out nearly a quarter of United States refining capacity in 2005. Soaring oil and fuel prices are creating a stark divide in the Canadian economy. The oilpatch is bracing for a first-quarter profit windfall, even as fuel-sensitive sectors such as aviation scramble to contain the impact of rising costs — scaling back or scrapping flights altogether and raising fares. Canada may be the world’s fourth-largest oil producer, but “this does not protect us,” particularly when it comes to refined fuels, said Carol Montreuil, vice-president, Eastern Canada, for the Canadian Fuels Association. “We’re not immune to these price shocks because of how these markets are all interconnected. “Markets try to find an equilibrium,” he said. “It’s a question of supply and demand, with everyone trying at the same time to find supply and outbid each other to get their hands on those products.” So far, physical fuel shortages aren’t a concern for Canada, Montreuil said, the way they are in places like Europe where the International Energy Agency has warned that several countries could run out of jet fuel in as few as six weeks. Canada, while a net exporter of refined petroleum products overall, still relies on imports of fuels like gasoline, jet fuel and diesel to fully meet domestic demand — the vast majority of which comes from the United States. It’s never been an issue before, given how closely linked the two countries are, Montreuil said. “But if there was a product for which the balance is more delicate, jet fuel would probably be the one to keep an eye on,” he added. “If this crisis goes on for months and months, I think it will become real for everyone on the planet.” For now, Canada’s energy sector is emerging as a key beneficiary of the crisis that has choked off energy supplies from the Middle East. As global supply losses mount and tanker traffic remains constrained through the Strait of Hormuz — the most critical shipping lane for Persian Gulf exports — analysts say demand for Canadian barrels is rising, marking a sharp turnaround from earlier in the year. “Canadian producers are doing incredibly well out of this whole Mideast situation,” said John Cordner, market reporter with commodity pricing agency Argus Media. Unlike some of their global peers with operations in the Middle East, Canadian producers are “seeing all the benefits from the price rises without actually having their flows disrupted.” Oilpatch spending plans and earnings forecasts issued just a couple of months ago — based on prices averaging US$60 to US$65 per barrel — have been torn up. In Western Canada, analysts say oilfield service companies are being asked asked to move rigs and fracking crews onto sites earlier than originally scheduled, as activity in the sector picks up. “They’re absolutely making quite a bit of money at the moment,” Rory Johnston , oil market analyst and founder of research firm Commodity Context, said. “I’m unabashedly bullish right now, because Hormuz remains closed, and it’s pretty easy to remain this bullish when 15-plus percent of the world’s oil is currently offline.” The sector’s first-quarter earnings season is arriving as war in the Middle East continues to drive refined-fuel prices higher globally, driving up costs in transportation, agriculture, manufacturing and retail, and renewing worries about inflation. Skyrocketing refinery margins or crack spreads — the gap between crude costs and fuel prices— are driving higher refinery throughput and boosting demand for Canadian crude. The vast majority of Canadian production is exported by pipeline, typically a costlier option than tanker transport. But the Iran war has driven up seaborne freight rates, shifting the economics for U.S. Gulf Coast refiners and improving the competitiveness of Canadian barrels versus imports from Latin America or West Africa. Some U.S. Midwest refineries saw margins more than double for products made from Canadian heavy crude, from around US$20 a barrel a year ago, to US$40 or US$50 per barrel more recently, according to Argus. “If you’re a refiner and you can make lots of money selling the fuel products, you’re quite happy to pay up for the crude,” Cordner said. “All the lines that feed into the U.S. are running pretty full at the moment.” Among the oilpatch’s biggest winners from skyrocketing fuel prices are the integrated oilsands majors, including Cenovus Energy Inc. , Imperial Oil Ltd. and Suncor Energy Inc. Each of them has major refining or retail fuel operations, such as Suncor’s Petro-Canada network of gas stations. Suncor, in a stroke of fortuitous timing, began producing jet fuel at its Montreal refinery in November. The move is boosting domestic jet fuel supplies in Quebec and Ontario at a vulnerable moment for Canadian airlines that are scrambling to respond to a doubling in fuel costs since late February. Fuel is the largest cost in airline operations and Canadian carriers including Air Canada, WestJet Airlines Ltd. and Air Transat recently announced plans to suspend routes, cancel flights or increase fares. “What ends up happening is the economics of certain routes just won’t work,” Chris Murray, managing director of institutional equity research at ATB Cormark Capital Markets, said. “You definitely see an impact across the board in higher seat fares,” Murray said. “But then the question is, do the fares get high enough that you start to destroy demand?” The world’s leading jet fuel exporter, South Korea, has been forced to slash throughput at its refineries as its imports from the Middle East have fallen off a cliff since the start of the war. South Korea and its Asian neighbours have been desperately seeking alternative sources, reportedly U.S. and Russian crude, although Korea also received two tanker shipments of Canadian oil in March, up from zero the month before. The country also signed an agreement with Alberta to waive a three per cent tariff on crude imports from the province. More Canadian crude is also making its way onto tankers off the West Coast, bound for refineries in Asia. Shipments of crude from the Trans Mountain pipeline rose sharply from February to March, according to data from RBC Capital Markets. Although the increase partly reflected unusually low February volumes caused by a malfunctioning rail bridge that temporarily halted marine traffic at the country’s busiest port. March saw 26 oil tankers depart from the terminal, up from a multi-month low of 17 in February, RBC said Prices for heavy Canadian crude loading for export from Vancouver have risen sharply, increasing by about US$24 a barrel between April and May, from roughly US$57.08 to US$80.65 per barrel, according to data from Argus. Canadian barrels benefit from a “reliability factor”, Cordner said. “When you buy your crude off TMX, it pretty much always loads on time. Which, compared to other heavy options on the market right now — Ecuadorean, Venezuelan, Iraqi, West African — is a real benefit which I think TMX gets over other markets for sure.” Going into earnings season, analysts, investors and governments will be looking to see what Canadian oil producers will do with their profits. Spending on growth and expanding production has fallen out of favour in the energy business in recent years, with investors urging companies to focus on capital discipline and returning cash to shareholders. Pump relief possible for Canadians as Iran says Strait of Hormuz is openWhat the energy crisis looks like behind the wheel of an Alberta tow truck Despite forecasts calling for higher prices in the months ahead, it may still be too soon to tell if Canadian producers will have any appetite to loosen the purse strings, ATB Cormark’s Patrick O’Rourke said. The oilpatch is awaiting regulatory clarity expected to come from key agreements still being negotiated under Alberta’s memorandum of understanding on energy with Ottawa, O’Rourke added. “There are still are some question marks before you can really enthusiastically start investing growth capital.” — With files from Steven Wilhelm, Calgary Herald mpotkins@postmedia.com Energy Aftershocks is a project by the Financial Post that focuses on the ongoing fallout of the war in the Middle East. Watch this space for more stories about how the energy shock is echoing throughout Canada.