Despite severe oil market disruptions, the Middle East conflict has coincided with surprising market resilience. This tension between supply disruptions and market performance has put central banks in a challenging position, as higher oil prices add inflationary pressure even as growth slows.

To better understand the dynamic between heightened headline risk and underlying fundamental strength, Michael Miranda, President, BMO Family Office and Head of Investments, Wealth Management, moderated a special discussion titled “Middle East Conflict: Reading Market Signals About Risks.” The conversation featured:

• 

  Doug Porter, Managing Director and Chief Economist, BMO

• 

  Randy Ollenberger, Managing Director, Oil and Gas Research, BMO Capital Markets

• 

  Katherine Krantz, Portfolio Strategist, BMO Capital Markets

A podcast episode based on the discussion is available here:

Here are the main takeaways:

In terms of how much oil has actually been kept out of the market by disruptions to shipping in the Strait of Hormuz, Doug Porter said the conflict has followed BMO’s most pessimistic of its four early scenarios. But, despite the disruption, oil prices have moved much less dramatically, with prices remaining near the bank’s original forecast of US$95 to US$100 a barrel for the spring.

That is well below the US$130 to US$150 range Porter said would put more serious strain on the global economy. “It’s not a surprise that the markets have been able to manage US$100 oil,” he said, noting that the global economy has been able to cope with oil prices at these levels in the past.

For Porter, the pricing suggests investors still see the disruption as serious but temporary. “The only assumption must be that the market is absolutely convinced that, one way or another, this will not last much longer, and that supplies will reopen,” he said.

Temporary perhaps, but as Randy Ollenberger explained, the return to normal could take longer than current pricing suggests. Even if the U.S. and Iran agreed to end the conflict today, flows would likely need two to three months to normalize, while production and transport could take as long as six months to fully recover. He warned that a setback in peace talks or another escalation could quickly put renewed upward pressure on oil prices, leaving the market vulnerable to more volatility.

The threat to the oil supply isn’t the only risk investors are watching. Iran has also shown it’s been able to threaten infrastructure. There’s a lot for investors to digest, said Katherine Krantz, but you can’t prepare for every scenario. “You want to remain diversified,” she said. “You can't be positioned for every single geopolitical risk out there.”

Like oil, the impact of the conflict on the U.S. dollar has been muted. That’s a shift from the view at the start of the year when the global economy was headed into a recovery, which was expected to weaken demand for the U.S. dollar. Still, she added, that support could fade once investors start looking at riskier assets again.

The fallout has been more obvious in rates and inflation expectations. Porter said a 10% rise in oil prices tends to add roughly two-tenths of a percentage point to inflation in advanced economies. That effect has filtered into headline inflation expectations, but whether it pushes core inflation higher is still an open question. Longer-term bond yields have risen, though they haven’t broken out of the range they’ve been in over the past year.

The longer oil stays elevated, the more complicated the rate outlook becomes. Porter said BMO still does not expect the Bank of Canada to raise rates this year, but the central bank’s latest language hinted at a more aggressive path if inflation broadens. “They didn’t just say they may have to raise rates,” he said. “They specifically said they may have to raise rates in a consecutive manner.”

In the U.S., BMO had projected two rate cuts later this year, after the conflict ended, but Porter said there is now a clear risk the timing slips into 2027. “There’s really no rush for the Fed to cut,” he said. “The economy is not particularly weak. We’ve got a full-on AI boom helping support the economy.”

In the current climate, Porter said few economies are more insulated than Canada. As an exporter of oil, natural gas, aluminum and fertilizer, Canada benefits from higher prices, especially in producing provinces such as Alberta, Saskatchewan and, to a lesser extent, Newfoundland. Even so, he said the hit to consumers and non-producing regions outweighs those positives in the near term, leaving Canada with a modest net negative for now.

Energy companies haven’t chased the recent rise in prices, Ollenberger said. Near-term oil has moved close to US$100, but longer-dated prices have stayed closer to US$75 to US$80, which is not enough to drive a major increase in capital spending. Higher cash flow has strengthened balance sheets, but Ollenberger said the industry is far more disciplined than it was a decade ago.