While military action was expected, the pace of escalation has been less predictable.
March 27, 2026
By Tasneem Azim-Khan, Vice President and Chief Investment Strategist and Noha Fazili, Research Analyst
The following commentary is for the purposes of providing context and perspective around the recent flare up in hostilities in the Middle East. The commentary is not intended to be political, nor should it take away from human tragedy related to these events.
With oil prices reclaiming the $100 per barrel level for the first time since 2022, and up more than 50 percent year-to-date, the market is still grappling with the increasingly uncertain endgame for the Iran conflict. Questions abound as to how long military actions will persist across the Gulf region, what this implies for energy markets and the magnitude of the global second order economic impacts. The answer to these questions will largely depend on the duration and degree of disruption permeating from this conflict.
The following discussion aims to provide background and context to the conflict. However, we acknowledge an exceptionally volatile backdrop with the narrative shifting on a day-to-day basis. By the time you read this, the world could look different. To wit, right before this article went to press, brent crude prices were receding from highs set in late March as news emerged of President Donald Trump’s 15-point peace plan for Iran (which has since been rejected by Iran’s government).
Fortunately, markets historically tend to look past geopolitical crises—not always, but they tend to. As unnerving as such periods as today can be, we prefer to prepare for such scenarios rather than predict them. We believe maintaining healthy levels of diversification across geographies, asset classes (equities, fixed income and alternatives), and a bias toward quality and defensive posturing, are key. The avoidance of panic selling, opportunistically taking advantage of air pockets in the market and remaining invested through periods of distress enhances portfolio efficiency and facilitates the compounding of returns over the long term.
On Feb. 28, 2026, the U.S. and Israel launched Operation Epic Fury and Operation Lion’s Roar, respectively, a series of coordinated attacks on Iran. This laid to rest several months’ worth of speculation about potential military action against Iran, but has also seemingly opened a Pandora’s Box, with currently no clear off-ramp to the geopolitical conflagration across the Middle East at the time of writing.
Viewing the attacks as an existential threat, Iran has responded aggressively. In addition to targeting Israel and regional U.S. bases, Iran has also struck energy and civilian infrastructure across neighbouring Gulf states. Most critically, in March it effectively shut down the strategic Strait of Hormuz to shipping—a critical energy chokepoint for the global economy that alone accounts for nearly 20 percent of the world’s oil and natural gas shipments. Since then at least 20 commercial vessels have been attacked off the coast of Iran.
Within less than 24 hours of the military operation beginning, Iran’s Supreme Leader Ali Khamenei was killed in an Israeli “decapitation” strike. Yet the leadership vacuum in the country was fleeting. In early March, Iran’s Assembly of Experts selected Mojtaba Khamenei, the second child and son of Ali Khamenei, to become the third and new Supreme Leader of Iran.
This marks the first time since the 1979 Islamic Revolution that Iran’s Supreme Leader has passed from father to son—an unusual development for a state founded explicitly to overthrow the hereditary rule of the country’s previous leader, the Shah Mohammad Reza Pahlavi. Yet Mojtaba Khamenei, who is 56, has earned a reputation as a powerful figure behind the scenes of his father’s decades-long tenure at the top of the country’s ruling structure. This has seemingly strengthened the resolve and influence of the hawkish wing of the Iranian regime against the U.S. To wit, a slew of senior officials have vowed to continue fighting the expanding war, which has now persisted for more than three weeks.
These pledges by senior members of Iran’s government demonstrate just how far the reality divide is between the two sides of the conflict, given the Trump administration’s insistence for “unconditional surrender” from Iran. This demand is all-encompassing and calls for a dismantling of Iran’s nuclear program and missile capabilities, an undermining of the country’s regional influence in the Middle East, and meaningful change in leadership.
History would suggest regime change may remain elusive, particularly in a country such as Iran where the current theocratic (i.e., religious leadership) government is deeply entrenched, and there appears to be no truly well-organized opposition. The appointment of “Son of Khamenei” signals a continuation of the father’s hardline approach. With strong support from ultra-conservative clerics and much of the Islamic Revolutionary Guard Corps (IRGC), his leadership could in fact fortify Iran’s confrontational stance toward the West. Past examples provided by the wars in Iraq and Afghanistan underscore just how challenging lasting regime change can be, even with “boots on the ground” and military occupation.
More recent signs of further escalation include President Trump’s deployment to the region 2,500 U.S. marines aboard as many as three warships. These marines join more than 50,000 American troops already stationed across the region. We suspect the most likely intent behind their deployment is to support the reopening of the Strait of Hormuz, though another possibility could be the seizure of Kharg Island —an Iranian oil hub which the U.S. and Israel have already struck in the course of their military strikes.
Further and in yet another blow to Iran’s leadership, the Israeli military announced that it had killed one of Iran’s highest-ranking leaders, Ali Larijani, in an airstrike near Tehran. It also said it killed Gholamreza Soleimani, the head of Basij, Iran’s powerful militia and a key element of the regime’s security forces that is often used to control and terrorize protestors in the country. While this could reduce the government’s ability to drive forward its retaliatory attacks and maintain its control over the population, it is unlikely to cripple the regime at this juncture. According to the Wall Street Journal , Larijani was an important figure within the regime, yet the ranks of security forces that are key to its survival run deep. The Islamic Revolutionary Guard Corps alone has extensive leadership and around 190,000 active-duty fighters .
Thus far, support from U.S. allies has been limited. President Trump recently attempted to rally the international community to help reopen the Strait of Hormuz and, as such, to relieve pressure on spiking energy prices. Such attempts have been rebuffed or ignored to date, although countries such as France and Britain have begun to discuss how they might assist the Americans in securing the Strait. However, according to the Wall Street Journal , Germany has categorically declined, with German Defence Minister Boris Pistorius stating, “This is not our war. We did not start it;” while Japan and Australia indicated they are unlikely to send vessels to help.
Canada for its part has been sending mixed signals. Ottawa has stated that, like many other U.S. allies, it was not made aware of the planned military action by the U.S. against Iran in advance. While Prime Minister Mark Carney has been supportive of preventing Iran from acquiring nuclear weapons, he has stopped short of endorsing the war itself or committing Canadian armed forces to any direct participation. He indicated that Canada supported the U.S. strikes “with regret,” casting the attacks as a consequence of an abdication of international order. Defence Minister David McGuinty was emphatic that Canada’s position not to join the U.S. and Israel in their military attacks on Iran would not change. He left the door open to providing help to any Gulf nation seeking assistance in defending itself from Iranian attacks.
Never one to be dismissed, President Trump fired back at allies that refused to join the effort to reopen the Strait, stating “we will remember.” In an interview with the Financial Times , Trump said if NATO allies refuse to help, “it will be very bad for the future” of the alliance.
At the time of writing, Brent crude oil prices have jumped more than 50 percent on a year-to-date basis—to as high as US$106 per barrel, a stark contrast to the roughly US$67 per barrel seen just a month ago. Given that oil supply and demand are both highly inelastic in the short run—and typically behave as a transmission mechanism during periods of heightened geopolitical conflict—the surge in oil prices is not surprising.
The trajectory of energy prices going forward—and the broader economic impact of sharply higher energy prices of the global economy—will largely depend on the duration and severity of disruption of the conflict.
At this stage, the timeline remains highly uncertain. Policy experts in Washington suggest that expanding U.S. war objectives alongside Iran’s commitment to retaliate could propel the conflict well into the spring, particularly if the Strait of Hormuz remains inaccessible. Should such a scenario transpire, and disruptions persist for several more weeks, oil and natural gas prices could push higher still.
We are acutely aware that crises can often go from bad to worse. In the fog of war that has unfolded over the last few weeks, RBC Global Asset Management has pointed to a number of emerging factors that are shaping the outlook on energy markets:
The present reality is that shipping through the Strait of Hormuz has already fallen to nearly zero, suggesting that the worst-case supply disruption scenario is unfolding. At the same time, reports indicate that Iran may be laying naval mines in the Strait, while simultaneously negotiating safe passage with selected countries such as China, India and Turkey. Iran’s foreign minister has stated that Tehran is open to holding discussions with countries seeking safe access to the Strait, but that this would not be conditional on a ceasefire and that Iran “is prepared to continue the war for as long and as far as necessary.”
Iran itself is shipping oil through the Strait in almost the same volumes as before the war, supporting its faltering economy and feeding its war efforts. According to a recent estimate , Iran has been able to export 16 million barrels since March.
In early March, in the largest coordinated strategic supply stock release in the International Energy Agency’s history, and in response to the supply disruption related to the stranglehold Iran maintains on the Strait of Hormuz, Canada and 31 other nations agreed to release 400 million barrels of oil. Canada has also asked domestic oil producers to release oil stocks and is evaluating measures to boost exports. Despite the intervention, Brent crude prices remain elevated after repeated reports that oil tankers have been and continue to be struck in the Strait.
Even if OPEC+ countries were to attempt to increase production, logistical constraints could cap the effectiveness of those efforts, as many OPEC+ producers are already operating near capacity (with Saudi Arabia being a notable exception). Storage constraints are also beginning to emerge across the region, with some Middle East producers reportedly shuttering operations as storage capacity fills while export routes remain constrained. The mere existence of spare barrels of oil is inconsequential if critical waterways are inaccessible.
According to estimates from RBC Global Asset Management , under a more extreme negative scenario in which the totality of the Strait’s oil supply (approximately 20 to 21 million barrels per day) was eliminated from the market, the price of oil (WTI) could rise to around US$190/barrel. Fortunately, RBC GAM suggests that there are potential structural and policy-driven offsets that render such a scenario as less likely. As laid out below, these could cushion the impact of a sustained disruption and partially offset the theoretical loss of oil and natural gas liquids that typically transit the strait:
While estimates remain uncertain, they suggest that a ~20 mb/d shock may translate into a far smaller effective shortfall—closer to 5.5 mb/d—more consistent with current price levels than the extreme upside scenario mentioned earlier.
Following the shale revolution in recent decades, the U.S. has arguably become less vulnerable to oil price shocks. Production has risen from 5.4 million barrels per day in 2004 to roughly 13.5 million barrels per day in 2025, according to RBC Economics and U.S. Energy Information Administration estimates, transforming the U.S. from a net energy importer into a net exporter.
The U.S.’s status as a net energy exporter, and therefore its relatively lower reliance on energy supplies getting through the Strait of Hormuz, may afford it a more muted direct impact from the ongoing conflict. Still, U.S. shale production is unlikely to replace barrels lost through the near closure of the Strait. Shale producers will be challenged to scale production easily or quickly due to operational and financial constraints, and despite advancements in efficiency across the industry. Furthermore, players in this space remain price sensitive, more focused on capital discipline and less motivated by near-term profits. Despite its energy “buffer” and its fortunate geographic remoteness relative to the “blast radius,” the nature of globalized supply chains on several fronts ensures a myriad of transmission mechanisms that will inevitably deliver negative impacts on the U.S. economy.
As of mid-March 2026, U.S. gasoline prices have jumped past US$3.80 a gallon—their highest level since Oct. 2023. While the U.S. remains relatively well-stocked on motor fuel, with approximately 28.5 days of supply in inventories as of mid-March, prices at the pumps continue to reflect a snarled global energy supply chain. Even as higher oil and gasoline prices have received all the press, the knock-on effects are significant. It turns out a range of other goods and services might get a lot more expensive should this conflict persevere, creating a global inflation “double whammy.”
Prices for other items, such as food, could rise further due to increases in fertilizer costs. The Middle East is a major source of urea, a key input used in fertilizers globally. More than an estimated 30 percent of the world’s urea, and over 20 percent of its fertilizers , pass through the Strait of Hormuz. Similarly, roughly 20 percent of the world’s raw aluminum originates from the Middle East. Natural gas prices in Europe and Asia have doubled since the beginning of the war, which could push prices higher globally, and increased demand for U.S. liquefied natural gas could further push up prices in the country. Other areas likely to see upward price pressures include plastics, chemicals and pharmaceuticals, while higher jet fuel and diesel costs will make air travel less affordable, and goods transportation, such as trucking, more expensive.
Higher oil prices and second order effects driven by the violent spiral of war in the Middle East have an immediate effect on households that are left with less disposable income for consumption—which, at roughly 70 percent of GDP, is the lifeblood of the U.S. economy. For as long as the war persists, U.S. households (and their global counterparts, including Canada) are likely to pay higher prices at the pumps, on utility bills and in grocery and general food spending. Heightened economic uncertainty and geopolitical volatility may have a chilling effect on households’ willingness to spend generally, subsequently clipping overall demand levels. For lower-income households, which allocate a disproportionate share of their income to essentials, these pressures will undoubtedly exacerbate the affordability crisis and income inequality in the U.S., which is already near historically elevated levels in the country.
Viewed from a different angle, it is possible that the drag on consumption could be partially offset by higher revenues from the energy sector. However, the ultimate impact on GDP will depend on both the duration and magnitude of elevated oil prices. While some corporations in or tied to the energy sector may benefit from a boon in energy prices, top executives from some of America’s largest energy companies have raised concerns with the White House regarding the conflict, according to the Wall Street Journal . To the extent that the war expands and persists, prolonged high prices could boost these company’s bottom lines in the near term, but may over the medium-to-long-term trigger economic destruction and crimp fuel demand (in turn potentially forcing producers to slash production and cut costs).
Questions surrounding the outlook for U.S. inflation—already proving sticky to the upside relative to the Federal Reserve’s (the Fed’s) target—have been reasonably reignited. In our view, the risk of building stagflationary pressures has increased when considering the compounding effects of higher oil prices alongside existing tariff-related pressures. Based on estimates from RBC Economics, if oil settles in the range of $75-$100 per barrel for a sustained period, inflation will likely settle above three percent year-over-year.
It’s difficult to ascertain at this stage of the conflict how central banks will respond. For now, RBC Economics expects the Fed to adopt a “wait and see” approach through 2026. While higher oil prices are a gateway to higher inflation (and therefore raise the spectre of higher interest rates), this could very well be countered by a material deterioration in consumer activity—particularly if the conflict mutates from a multi-week to a multi-month (or even year-long) war. Weaker demand could have knock-on effects on the labour market in the medium term, in which case, interest rate cuts by the Fed and other central banks may very well remain a real possibility.
For Canada, higher oil and gas prices are theoretically positive for the economy. The energy sector accounts for a little under seven percent of GDP and 15 percent of total goods exports in 2025, according to RBC Economics . Despite the economic benefits that may be conferred onto the Canadian economy via higher energy prices, the near-term impact to GDP will likely be muted in the absence of an investment response—which is characterized by high costs and long construction timelines. In addition, to the extent that producers are worried that the recent price surge in oil could unwind, large capital expenditures are unlikely at this point in the conflict.
RBC Economics estimates that in a scenario where the West Texas Intermediate benchmark price remains at $100 a barrel, it could raise consumer price index by three quarters of a percentage point versus its February forecast (from before the start of the conflict) to a peak of around three percent in Canada this year. However, these estimates do not reflect any counter impact from disinflationary pressures from reduced household demand. Given the early stages of the conflict and lack of visibility on how it may unfold, RBC Economics maintains its forecast for the Bank of Canada to hold interest rates steady through 2026.
The key issue for equities is not whether oil and energy generally experience short-term price spikes, but whether higher prices persist long enough to damage confidence across financial markets and the broader economy. While we have remained modestly constructive on U.S. equities in 2026 and maintain that view for now, it is important to monitor energy market dynamics carefully. While the general earnings outlook is supportive of performance this year, stretched valuations, particularly in U.S. markets, remain vulnerable to disappointment and negative headline risk. Our constructive position on equities is tilted toward international equities, including Europe, Japan and emerging markets, where valuations remain relatively more attractive.
According to RBC GAM’s analysis of historical episodes , geopolitical shocks tend to produce relatively short-lived market reactions. Across past acts of war, the median experience has been roughly a three-percent decline in the S&P 500 Index, little change in bond yields and modest gains in gold, the U.S. dollar and oil during the initial reaction period, as shown below.
To wit, even though the S&P 500 Index has pulled back since late February, its year-to-date decline remains modest relative to global peers. Notably, weakness has been concentrated in mega-cap growth stocks—particularly the “Magnificent 7” —while broader indices and several international markets have shown greater resilience.
As always, past performance is not indicative of what may happen in the future. Several moving parts may conspire to drive markets lower. Even then, historic precedent would suggest a resilience of the markets as investors’ time horizons expand. Staying calm, staying diversified and staying invested over the long term remains our bias.
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