Oil markets have responded rapidly to the recent rise in tensions in the Middle East. As of now, WTI crude prices have jumped over 5% to $70.50 per barrel, reaching their highest point since mid-June. Similarly, Brent prices have increased and are now above $77 per barrel. The spread between Brent and WTI has been expanding in recent weeks as traders factor in a heightened risk premium due to escalating U.S.-Iran conflict concerns. Currently, the spread stands at $6.5, nearly double its historical average, yet still lower than the spread observed in 2022 after Russia’s invasion of Ukraine.
Although there has been a sharp movement in the short term, the price dynamics have remained more stable compared to previous geopolitical crises, highlighting various structural aspects of the current oil market. Investors generally perceive the ongoing situation as less impactful than the beginning of the 2022 Russia–Ukraine war, when crude prices briefly soared to nearly $140 per barrel due to extensive sanctions, significant supply disruptions, and Europe’s sudden energy withdrawal from Russia. In contrast, the present circumstances include more safeguards: U.S. crude exports are approaching four million barrels per day, OPEC+ has some spare capacity, and strategic reserves are still accessible. Nonetheless, this current situation is regarded as the most serious threat to energy supply from the Middle East in several years, resembling a worst-case scenario regarding supply risks compared to earlier regional conflicts. U.S. crude oil rose more than 7% on Monday.
Market Response to Tensions
The Strait of Hormuz serves as a vital chokepoint for global markets, facilitating the passage of approximately 20% of the world’s oil. This route is also essential for transporting refined products, LNG, fertilizers, and important food supplies. In response to potential threats, shipping companies have started to reroute their vessels, and although alternative pipelines in Saudi Arabia and the UAE could potentially redirect around 5 million barrels per day, these options are not enough to completely compensate for a significant disruption. Even a brief closure could lead to escalating prices with each passing day of interruption, while insurance and freight costs might keep prices high even after normal flows are restored. The Strait of Hormuz is a critical naval shipping route.
As we look to the future, the trajectory of oil prices today will largely depend on the developments in the ongoing conflict, which introduces significant uncertainty in the near term. Recently, oil prices surged on Monday due to U.S.-Iran conflict concerns. Therefore, we outline three potential scenarios for how prices might change:
The baseline scenario (Contained Escalation) anticipates a degree of persistence over the upcoming weeks, yet without significant, ongoing disruptions to key energy infrastructure or shipping routes. In this context, WTI prices are projected to average in the low $70s per barrel in the near term, reflecting a moderate geopolitical risk premium alongside some physical supply effects. Planned output increases from OPEC+ in April, combined with relatively subdued global demand, are expected to limit price increases and allow for a slight decline once tensions subside. Oil prices have risen 17% this year prior to the weekend.
WTI and Brent Price Surge
The baseline scenario anticipates some level of persistence over the upcoming weeks, provided there are no direct and sustained disruptions to significant energy infrastructure or shipping routes. In this context, WTI prices are expected to average in the low $70s per barrel, reflecting a moderate geopolitical risk premium alongside some physical supply effects. Anticipated output increases from OPEC+ in April, coupled with relatively weak global demand, are likely to limit price increases and allow for a slight decline once tensions subside. In an escalation scenario, the risks associated with the Strait of Hormuz, a critical naval shipping route, would heighten, potentially leading to shipping interruptions that could strand up to 20 million barrels per day for an extended duration. Under such circumstances, WTI prices might surge towards $80 to $100 per barrel, with the possibility of temporarily exceeding $100 if disruptions persist. The repercussions would extend to refined products and global gas markets, exacerbating inflationary pressures. The length of this scenario could last several months, influenced by the ongoing nature of asymmetric attacks and broader regional instability.
: In a scenario of escalation, the risks associated with the Strait of Hormuz, a critical naval shipping route, become more pronounced, leading to shipping disruptions that could leave up to 20 million barrels per day stranded for an extended duration. WTI prices might surge towards $80–$100 per barrel, with the potential to temporarily surpass $100 if interruptions are prolonged. The effects would also spill over into refined products and global gas markets, exacerbating inflationary pressures. This situation could persist for several months, influenced by the ongoing nature of asymmetric attacks and wider regional instability. De-escalation (Rapid Resolution): In a de-escalation scenario, prompt military measures would curtail further retaliation and prevent significant damage to infrastructure. In such a case, oil prices could quickly reach their current levels and reverse much of their recent increases, with WTI potentially dropping back to around $60 per barrel within a few weeks. Nevertheless, even in this scenario, some residual risk premium may remain above historical averages due to ongoing uncertainty regarding Iran’s long-term stance.
Implications of Macroeconomics
Geopolitical Impact on Oil Prices
From a broader economic viewpoint, elevated oil prices today can contribute positively to the inflation forecast while simultaneously hindering economic expansion, but this effect is contingent on their persistence. Up to this point, our assessment of oil prices has had minimal impact on growth and has only slightly increased headline inflation indicators. Notably, U.S. crude oil rose more than 7% on Monday.
Should oil prices today persist in their upward trajectory – as indicated in the “Escalation Scenario” – the effects on growth may soon become apparent. A common guideline suggests that each $10 rise in WTI reduces U.S. real GDP growth by approximately 0.1 percentage points. This could translate to a potential reduction of 0.2-0.4 percentage points. The inflationary effects would be more pronounced, possibly contributing up to three-quarters of a percentage point to the annual average for 2026. However, the secondary impacts on core inflation measures would likely be significantly less due to the transient nature of the shock. This indicates that central banks may not make substantial changes to monetary policy as they overlook these temporary price fluctuations. Additionally, Trump stated the U.S. would continue large scale strikes in Iran.
In Canada, the combination of rising near-term oil prices today and a robust U.S. dollar, set against a backdrop of heightened global risk aversion, would enhance cash flows for Canadian producers, somewhat mitigating broader growth challenges. However, with diminished demand from the U.S., lower consumer purchasing power, and increased global uncertainty, the overall macroeconomic consequences of a prolonged escalation scenario are likely to be detrimental, even with improvements in the energy sector. Trump stated the U.S. would continue large scale strikes in Iran.
Canada continues to be a reliable and strategically significant global energy supplier, with the oil sector already set for slight recovery this year. It was anticipated that capital expenditures would rise by approximately $1.5 billion, following a $1.6 billion decline in 2025. A consistent rise in oil prices today could shift investment risks to the upside, although structural limitations and high uncertainty might restrict the extent of the response. Gas prices in Canada increased a few cents overnight.
