Executive summary
- On the evening of March 1, Brent crude traded at USD $78.15 per barrel, up approximately 17% over the past two weeks, reflecting a geopolitical risk premium that markets had already begun pricing.
- The critical distinction from here is between a contained conflict, which would likely keep oil in the $80 range, and a sustained supply disruption, which could push prices toward $100.
- At current levels, the inflation impact is incremental and manageable. A sustained move toward $100 would materially complicate central bank easing paths, particularly in emerging markets.
- Early market reaction in Asia reflects an orderly repricing of risk.
- We’d reassess our portfolio positioning only if energy prices remain elevated long enough to tighten financial conditions and impair growth. That isn’t the base case today.
- Our portfolios remain positioned through diversification, real asset sensitivity, multi-factor exposures and liquid alternatives designed to manage volatility across regimes.
U.S. and Israeli strikes on Iran, which began on Feb. 28, have crystallized risks that markets had been gradually repricing for weeks. Markets anticipated escalation. Oil moved first.
The question now is whether this remains a geopolitical premium event or evolves into a genuine supply shock with broader macroeconomic consequences.
We frame the situation through three transmission channels: oil, inflation and regional spillovers.
Oil markets: premium priced, disruption not yet
Iran accounts for approximately 4.7 million barrels per day, or roughly 4% to 4.5% of global oil supply (1). That makes it material, particularly given the strategic importance of the Strait of Hormuz.
Over the past two weeks, Brent has risen 17%. This reflects a political risk premium that had been building amid rising tensions.
During last year’s 12-day conflict, oil infrastructure was largely spared, and Brent rose roughly $10 per barrel at its peak. The current move is comparable in magnitude. From here, two scenarios matter:
- Contained escalation
Oil drifts toward or slightly above $80 as uncertainty persists. No meaningful supply is lost. This remains a repricing event.
2. Supply disruption
Iranian production is impaired or shipping through the Strait of Hormuz is disrupted. Oil could move toward $100 per barrel. Natural gas prices would likely rise as well. That would represent a genuine supply shock.
OPEC+ policy becomes critical in the second scenario. Heightened supply risk increases the probability of a production increase at upcoming meetings, potentially beyond the rumoured 137,000 barrels per day. That response would moderate, though not eliminate, volatility.
Inflation and central banks: manageable for now
Oil is the primary transmission channel into global inflation.
We believe a useful rule of thumb is a 5% year-over-year rise in oil prices adds roughly 0.1 percentage points to headline inflation in advanced economies.
At $78 oil, the inflation impact is incremental and manageable.
A sustained move toward $100 could add more than one percentage point to developed market inflation and would likely delay or reduce expected rate cuts by major central banks.
Emerging market policymakers are typically more sensitive to commodity swings. Higher oil and gas prices could tighten financial conditions more quickly in those economies.
For now, this is an inflation bump. It isn’t an inflation regime shift.
Regional economic implications
Retaliation from Iran has begun. The scale and duration will determine regional impact. Israel’s economy is vulnerable to renewed disruption. During last year’s 12-day conflict, Israeli GDP fell 1.1% quarter over quarter in Q2 (2).
Elsewhere in the Gulf, risks include:
- Threats to U.S. military bases in Bahrain and Qatar
- Airspace closures affecting travel and trade
- Business disruptions tied to regional security concerns
Within Iran, sustained escalation raises the probability of regime change or policy shifts. Long-term reintegration into the global economy is conceivable. Near-term instability is more likely. Globally, the dominant transmission channel remains energy.
Market reaction: early signals from Asia
As of the evening of March 1 EST, early market reaction in Asia reflected a measured risk adjustment:
- The Nikkei 225 was down 1.53%.
- The Hang Seng Index was down 2.23%.
These moves are consistent with a geopolitical risk repricing rather than disorderly selling.
It wouldn’t be surprising to see European and North American markets open lower on Monday, March 2, reflecting a similar adjustment in risk appetite. The magnitude of moves will depend on whether energy prices extend higher and whether escalation signals intensify.
Importantly, at this stage, the reaction remains orderly. We aren’t observing signs of systemic stress or liquidity disruption.
Our portfolio implications
In our “reverse murder mystery” framework, we begin with outcomes and work backward to drivers.
The outcome that would materially alter positioning is clear: a sustained physical supply disruption that pushes oil toward $100 and tightens financial conditions globally.
We’re not observing that today.
Brent is up 17% over the past two weeks. Risk has been repriced. Asian markets are adjusting in an orderly fashion. Credit spreads remain contained. Liquidity conditions remain stable.
This suggests markets currently view this as a contained geopolitical risk, not systemic stress.
Growth
Oil at $78 trims real incomes at the margin but doesn’t derail global growth. Our base case for continued, albeit uneven, global expansion remains intact.
We’d reassess only if energy prices remained elevated long enough to compress margins and materially impair demand.
Inflation
Higher oil lifts headline inflation temporarily. It becomes a policy concern only if it feeds into services inflation and expectations. That transmission hasn’t yet occurred.
Central banks are likely to look through a temporary energy shock. A sustained move toward $100 would change that calculus.
Positioning and risk management
We’re not reacting to headlines. We’re evaluating transmission channels. Across our multi-asset portfolios:
- Diversified equity exposure remains appropriate.
- Real asset sensitivity provides natural ballast in higher energy environments.
- Multi-factor allocations reduce reliance on narrow market leadership and enhance resilience.
- Liquid alternatives remain valuable tools for managing volatility and correlation shifts during geopolitical stress.
This episode reinforces why our portfolios are constructed around diversification, risk budgeting and scenario analysis rather than binary macro calls.
If sustained supply disruption materializes, we’ll adjust deliberately and systematically. Until then, discipline remains the appropriate response.
Sincerely,
Corrado Tiralongo (he/him)
Vice President, Asset Allocation & Chief Investment Officer
Canada Life Investment Management
Sources:
- 2025 OPEC Annual Statistical Bulletin
- Capital Economics
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