Middle East Developments and Their Implications for Our Oil Assumptions

The Middle East remains highly fluid, with US‑Iran negotiations broadly oscillating between tentative engagement and renewed confrontation. However, weekend talks failed to deliver a breakthrough, with Washington continuing to reject Iranian control over the Strait of Hormuz, while Tehran refuses limits on its nuclear program.

The tone hardened further, with the US moving towards restricting access through the Strait. The threat of a US-led blockade introduces tangible supply disruption risk in one of the most critical chokepoints in global energy markets.

The broader strategy appears aimed at pressuring Iran by targeting its export capacity, while potentially drawing other actors—notably China—into the negotiation dynamic. But the approach carries high execution risk, with Iran still having multiple retaliation options, including targeting regional energy infrastructure. Any escalation may be difficult to contain.

Latest estimates point to a 12 mbpd hit to oil supply in March. In light of ongoing developments and early assessments of physical damage, our basecase forecast for oil prices assumes a disruption that lasts longer than assumed in our March Economic and Financial Outlook External link.. Shortfalls seem likely to extend through mid‑2026 and we believe that they will be only partially offset by emergency reserve releases and incremental gains in production elsewhere (graph 1). On net, we estimate a cumulative supply loss of roughly 550 million barrels after mitigation. Production is expected to recover gradually but with a lag, implying a period of tightening inventories and elevated prices before normalization takes hold.

Reflecting this altered supply path, we now lean towards a revised oil price outlook (graph 2) holding crude WTI at an average of US$100/bbl through April and May (vs. US$80–US$85 in March), before declining gradually: US$83/bbl by end-Q3 2026 , US$80/bbl by end‑2026 (vs. US$61), and US$70/bbl by end‑2027 (vs. US$66).

If this path materializes, headline inflation in Canada would be pushed higher but underlying inflation pressures would remain more contained, given the current starting point of excess capacity and a relatively soft labour market. The terms-of-trade and energy capex boost still needs to be weighed against the hit to household finances and confidence, as well as the margin compression in energy-intensive sectors.

On net, our new path for oil prices leans towards a slightly earlier normalization of rates into 2027 than previously assumed but not a material shift in the policy path at this time. We will publish our detailed estimates in our Economic and Financial Outlook next week, taking into account the latest developments.