A renewed Middle East conflict: How long and how great a disruption?

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Source – RBC Wealth Management, Bloomberg; data through 3/2/26

The chart shows the Dutch TTF Natural Gas Futures Index in euros from January 2021 through March 2, 2026. It began at €19.12 per megawatt-hour (MWh) and drifted up, spiking to €180/MWh in December 2021, soon before the Russian military intervention in Ukraine. It pulled back but then spiked again to €227/MWh in March 2022 when Germany halted the certification of the Nord Stream 2 pipeline that was to carry Russian gas. It pulled back and spiked once again, to €339/MWh, when Germany halted Russian gas flows through the Nord Stream 1 pipeline. Prices fell significantly through mid-2023, reaching around €23/MWh. European natural gas has traded in a range of about €23/MWh to €56/MWh since then. The recent low point was €26.60/MWh on December 10, 2025. Since then, it has moved up and was at €44.51/MWh on March 2, 2026.

What about other energy transit routes in the region?

• Though there are some oil pipeline outlets that could theoretically moderate the full impact of the closure of the Strait of Hormuz, such as Saudi’s East-West pipeline (7 mb/d capacity) and UAE’s Abu Dhabi Crude Oil Pipeline (ADCOP) pipeline (1.5 mb/d capacity), by a few million barrels a day taking into account current operating rates, significant risks and limiting factors exist. We would emphasise that both assets remain at serious risk of being caught in the crosshairs of the conflict themselves, in which case damage could eliminate this option entirely. There is precedent for such attacks, as we saw in the 2019 targeting of the East-West pipeline by Houthi drones, which damaged two pumping stations and temporarily downed crude flows through the route. Furthermore, rerouted exports via the Red Sea would similarly be vulnerable. We would also note that some regional producers lack any potential alternative routes, such as Kuwait and southern Iraq.

Why OPEC production increases could be a moot point

• Moreover, the absence of serviceable sea lanes essentially renders any production increase an entirely moot point, as the lion’s share of OPEC barrels in the region could essentially become stranded assets in an extended war scenario.
• In our view, every OPEC+ producer is essentially maxed out with the sole exception of Saudi Arabia. Hence, the barrel impact of any headline OPEC+ increase will be limited by the lack of actual production capabilities. Moreover, any surge above levels produced in the April 2020 price war peak would likely necessitate tapping storage. Even then, the utilisation of any spare barrels will be severely limited if critical waterways are rendered inoperable. Spare barrels serve little purpose if there are no serviceable sea lanes.

Iranian military strike capabilities

• While there has been considerable focus on Iran’s missile stockpile, we believe that the country’s extensive unmanned aerial vehicle (UAV) capabilities may provide it bandwidth to continue asymmetric attacks and move the conflict up the escalation ladder. Some leading military experts are already drawing comparisons to the Russia-Ukraine conflict, with both sides deploying UAVs to conduct disruptive infrastructure attacks and to make up for missile stockpile shortfalls. Tehran has already launched its cheap and domestically produced Shahed family of one-way drones against a variety of targets across the Middle East this weekend [Feb. 28–March 1], including U.S. bases and civilian sites in Bahrain, Iraq, Kuwait, Qatar and the UAE.

Lori Calvasina | Head of U.S. Equity Strategy, RBC Capital Markets LLC

For the U.S. stock market, it all may come down to the oil market

• When it comes to stocks, it still may mostly come down to the oil market. We’ll leave the oil price forecasting to our colleagues in Commodity Strategy & MENA Research who are monitoring the situation with the Strait of Hormuz [see above] … we’ve been constructive on U.S. equities in 2026 and that remains our view today. But we do think it’s important to keep a close eye on oil market dynamics given that there has been an inverse correlation of -40 percent between the S&P 500 and oil prices since COVID [beginning in the first quarter of 2020]. In our view, the key issue is not whether there is a short-term spike in oil prices. What’s more relevant to stocks, in our opinion, is whether a sustained impact to oil prices is seen, which is what we think would have more of a potential to damage confidence at various levels.

Equities started to reflect the risks ahead of the actual beginning of the conflict

• The U.S. equity market was already starting to digest the escalation in the region coming into the weekend [Feb. 28–March 1]. The S&P 500 has moved sideways so far in early 2026, reined in by a fairly long list of concerns – AI fears, private markets concerns, an underwhelming reporting season, extended valuations and an increase in a few different flavours of geopolitical risk … we think it’s fair to say that both the choppiness in the S&P 500 this year and the outperformance of the Energy sector were reflecting heightened geopolitical risk to some degree.

Valuations could come under pressure

• Elevated geopolitical uncertainty isn’t good for S&P 500 price-to-earnings (P/E) multiples broadly, which have already been under pressure. Whenever geopolitical uncertainty spikes, the first thing that usually jumps into our mind is that forward P/E multiples tend to come under pressure for the S&P 500. This speaks to one of the transmission mechanisms of geopolitical conflicts and risks to equities … in recent years we’ve seen some deterioration in S&P 500 median P/Es when uncertainty regarding national security has spiked in the spring of 2025 (Liberation Day tariffs), the first quarter of 2022 (Russia’s invasion of Ukraine), and the first quarter of 2020 (COVID). This is something we also saw in early 2003 as the U.S. was preparing to invade Iraq.

The U.S. stock market has been consolidating recently at lofty levels following a big bull market rally

S&P 500 Index

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Source – RBC Wealth Management, Bloomberg; data through 3/2/26

The chart shows the S&P 500 Index beginning from January 2021 through March 2, 2026. It began at 3,736 level and rallied to over 4,700 into early 2022. Then it pulled back, reaching a low point of 3,577 on October 12, 2022. It later rallied significantly and reached 6,932 in late December 2024 before selling off sharply in April 2025. It reached new highs during 2025. In late 2025 and early 2026, it has consolidated in a narrow sideways pattern at relatively high levels, ending at 6,881 on March 2, 2026.

Keeping an eye on corporate and consumer sentiment

• Elevated geopolitical uncertainty/risk has become a feature of the post-COVID environment, but could weigh on sentiment. We are primarily thinking about the read-through of geopolitics to corporate sentiment (where uncertainty has improved but remains elevated), given that references to geopolitics on public company earnings calls have been extremely high in recent years relative to their pre-COVID history … but for now expect the “manage through” messaging to persist [meaning, corporate leaders have previously, repeatedly indicated they are managing through external challenges]. Putting corporates aside for the moment, we will also be monitoring how these latest developments in U.S. foreign policy impact consumer confidence/sentiment (which has been stabilising around extremely low levels in both the Conference Board and University of Michigan surveys) as well as public opinion polls (where voter approval on foreign policy has been low).

Be careful with historical stock market performance studies

• We’d be careful paying too much attention to historical studies that suggest always buying stocks on bad geopolitical news. Note that we are constructive on the U.S. equity market this year, but [our study of prior episodes] reminds us that it is very difficult to look at geopolitical events in isolation when it comes to the stock market. What’s happening with geopolitics is usually a piece of a larger puzzle.

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