Escalating Middle East Tensions Jolt Oil Markets

Oil markets have reacted swiftly to the latest escalation in Middle East tensions. At the time of writing, WTI crude prices have surged more than 5% to $70.50/bbl, marking the highest level since mid-June.  Brent prices have moved up by a similar amount and are currently sitting at over $77/bbl. The Brent-WTI spread has been widening in recent weeks as market participants have been pricing in a higher risk premium amid escalating U.S.-Iran tensions. Currently, the spread sits at $6.5 – about twice as high as its historical average – but still below the spread reached in 2022 following Russia’s invasion of Ukraine. 

Despite the sharp near-term move, price action has remained more contained than in some past geopolitical shocks, reflecting several structural features of today’s oil market. Markets broadly view current events as less disruptive than the onset of the 2022 Russia–Ukraine conflict. At that time, crude prices briefly surged to nearly $140/bbl amid sweeping sanctions, physical supply losses, and Europe’s abrupt energy cutoff from Russia. By contrast, today’s environment features more buffers: U.S. crude exports are near four million barrels per day (bpd), OPEC+ retains some spare capacity, and strategic reserves remain available. That said, the current episode is widely viewed as the most significant threat to Middle East energy supply in several years, and closer to a worst-case scenario from a supply risk standpoint relative to past regional conflicts. 

A central focus for markets is the Strait of Hormuz, a critical chokepoint through which roughly 20% of global oil flows. It's also critical in shipping refined products, LNG, fertilizers, and key food inputs. Shipping companies have already begun rerouting vessels as a precaution, and while alternative pipelines in Saudi Arabia and the UAE could redirect an estimated 5 million/bpd, these routes are insufficient to fully offset a prolonged disruption. Even a short-lived closure would likely result in prices ratcheting higher with each day of interruption, while insurance and freight premiums could keep prices elevated even after physical flows resume. 

Looking ahead, oil prices will be driven by how the conflict evolves, implying considerable uncertainty in the days ahead. As such, we sketch out three possible scenarios of how prices could evolve:

• Baseline Scenario (Contained Escalation): The baseline assumes some persistence over the next several weeks but without direct, sustained disruptions to major energy infrastructure or shipping lanes. Under this scenario, WTI prices average in the low $70s/bbl in the coming weeks, reflecting a moderate geopolitical risk premium and some physical supply impacts. Planned OPEC+ output increases in April and relatively weak global demand help to cap the upside and allow prices to drift a bit lower once tensions ease.
• Escalation (Material Supply Disruption): In an escalation scenario, risks to the Strait of Hormuz intensify, with shipping interruptions stranding up to 20 million/bpd for a sustained period. WTI prices could rise toward $80–$100/bbl, potentially exceeding $100 temporarily if disruptions are prolonged. Spillovers to refined products and global gas markets would amplify inflationary pressures. The duration of this scenario could extend for several months, depending on the persistence of asymmetric attacks and broader regional instability.
• De-escalation (Rapid Resolution): In a de-escalation scenario, swift military action limits further retaliation and avoids major infrastructure damage. In this case, oil prices could peak quickly at current levels and retrace much of their recent gains, with WTI falling back toward $60/bbl within a couple of weeks. However, even here, some residual risk premium may persist above historical norms given heightened uncertainty around Iran’s longer-term posture.

Macro Implications

From a macroeconomic perspective, higher oil prices pose some upside to the inflation outlook and a headwind to economic growth, but only if they’re sustained. So far, our mark-to-market on oil prices has barely moved the needle from a growth standpoint and has added no more than a tick or two to headline inflation metrics. 

However, should oil prices continue to push higher – as suggested under the “Escalation Scenario” – the growth impacts could become visible. A rule of thumb is that every $10 increase in WTI subtracts roughly 0.1 percentage points from U.S. real GDP growth. This would imply a potential drag of 0.2-0.4 percentage points. The inflation impacts would be more notable, potentially adding as much as three-quarters of a percentage point to the 2026 annual average. However, the secondary effects to core measures of inflation would be considerably smaller given the temporary nature of the shock. This suggests no meaningful shift in monetary policy as central banks look through the temporary price effects.

For Canada, higher near‑term oil prices, combined with a stronger U.S. dollar amid elevated global risk aversion, would support cash flows for Canadian producers, partially offsetting broader growth headwinds. Still, with weaker U.S. demand, reduced consumer purchasing power and heightened global uncertainty, the net macroeconomic impact of a prolonged escalation scenario would likely be negative, despite gains in the energy sector.

Canada nonetheless remains a stable and strategically important global energy producer, with the oil patch already positioned for modest improvement this year. Capital spending was expected to rebound by roughly $1.5 billion, following a $1.6 billion contraction in 2025. A sustained increase in oil prices would tilt risks to the upside for investment, though structural constraints and elevated uncertainty may limit the scale of the response.  

Disclaimer

This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.