Crude oil prices surged to a three-month high on Thursday amid concerns that the conflict between the United States and Iran is widening across the Middle East and could spark another global inflationary spiral.
Hostilities escalated this week as the U.S. and Iran continued to trade blows over the Strait of Hormuz. The recent involvement of Yemen’s Iran-backed Houthis have raised further fears that oil trade could be halted at other chokepoints in the region.
Brent Crude hit US$100 a barrel for the first time since May on Thursday, while the commodity’s North American benchmark, West Texas Intermediate, hit US$92.
“The fear is this escalation is going to spread wider than the Strait of Hormuz,” said Michael Dehal, senior portfolio manager at Dehal Investment Partners of Raymond James.
Since the conflict began in early March, Saudi Arabia has been ramping up its use of alternative shipping routes. That includes its 1,200-kilometre East-West pipeline carrying oil to the Red Sea, which has become a new point of conflict in the fighting.
More than 93 crude oil tankers were operating in the Red Sea on Tuesday, compared with 50 tankers a day before the war, according to Kpler, a maritime intelligence firm.
From the port of Yanbu in the Red Sea, Saudi Arabian oil has been travelling south through the Bab al-Mandab Strait – a waterway narrower than the Strait of Hormuz, between eastern Yemen, Djibouti and Eritrea. The sea lane is one of the few oil chokepoints in the region, connecting Asia, Africa and the Middle East to Europe by offering a path to the Suez Canal through the Red Sea.
But Saudi Arabia’s overall crude exports are still far below prewar levels, and hostilities from the Houthis risk further halting exports that travel through the Bab al-Mandab Strait.
On Monday, the Houthis threatened to impose a naval blockade in the strait, through which 10 per cent of the world’s daily trade flows in peacetime. On Wednesday, the rebel group said it targeted two Saudi oil tankers with missiles and drones in the Red Sea. Earlier this week, two oil tankers heading toward the strait made U-turns and were found to be moving north toward the Suez Canal, according to Kpler.
Marc-Antoine Dumont, senior economist at Desjardins, said the uncertainty around alternative waterways underscores how vital the Strait of Hormuz is as an oil shipping route. He said other shipping routes only have the capacity to make up for about 50 per cent of usual export volumes.
“The other half, there’s currently no way to get around it,” Mr. Dumont said.
The widening conflict caused a sharp sell-off in the bond market, sending yields higher across the curve on Thursday, as traders weighed inflationary risks from oil hitting three-month highs.
The two-year U.S. treasury hit a 52-week high, closing at 4.35 per cent, while the 10-year U.S. treasury reached about 4.7 per cent – its highest level since January, 2025.
In tandem, interest rate swap markets have increased the odds of a Federal Reserve rate hike at the central bank’s July 29 meeting.
In Canada, the recent escalation in oil prices has also increased expectations that the Bank of Canada will raise rates by the end of the year.
Economists still expect the Bank of Canada to hold the benchmark rate at 2.25 per cent in September. However, swap markets have increased the odds of a hike in October and fully expect a hike by the end of the year.
At the last policy meeting on July 15 – when Brent was trading at US$85 a barrel – Bank of Canada Governor Tiff Macklem said that if inflation stemming from high oil prices starts to broaden, it would be “a warning sign” to the central bank.
“Clearly, if oil prices go higher, they stay higher; the likelihood that that gets passed on broadens risks.” Mr. Macklem said.
“There’s a progression from broadening to persistence. If that happens, we may well need to raise interest rates.”
If the Fed hikes rates before the Bank of Canada, that could put additional downward pressure on the Canadian dollar, which has been tumbling since the spring.
The escalating conflict is also forcing equity markets to put inflation risks front and centre, instead of the more recent focus on business fundamentals and earnings.
The S&P 500 shed more than 1 per cent over the day, and the Nasdaq 100 fell around 2 per cent.
“There’s a lot of crosswinds happening in the markets, but I think the biggest story today is oil, yields, are causing downward pressure in the equity market.” said Mr. Dehal.
However, Canadian energy stocks are largely benefiting from the run-up in oil prices, offering Canadian oil and gas companies more cash flow and higher returns for shareholders.
The iShares S&P/TSX Capped Energy Index ETF, which contains large Canadian energy players such as Canadian Natural Resources Ltd., Suncor Energy Inc. and Cenovus Energy Inc., is up 17 per cent since the conflict broke out at the end of February. After the ceasefire in mid-June, the ETF fell back to levels seen before the war, but since the renewed hostilities on July 7 it has regained those losses.
Mr. Dumont of Desjardins said while it’s difficult for Canadian producers to increase output for now – as many pipelines are running near full capacity – the current price environment they are producing is nevertheless favourable.
“We have a solid industry right now, and it will be beneficial for them as it is. When we talk about oil prices and being higher, we think it’s a net positive for the Canadian economy on average,” he said.
UPDATE: July 24/26
Oil prices ease but are set for 10% weekly gain as Trump mulls ‘bigger than ever’ attack on Iran
https://www.cnbc.com/2026/07/24/oil-price-trump-hormuz-red-sea-iran-war.html
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