Markets are still betting on a short disruption. What if they are wrong?
Corrado Tiralongo - Jul 20, 2026
Markets have become increasingly comfortable with geopolitical risk.
That is understandable. Earlier disruptions in the Middle East proved temporary. Energy markets adjusted more quickly than many expected, supply found alternative routes, and the global economy continued to expand.
The renewed closure of the Strait of Hormuz is not simply another disruption. It is a reminder that the global energy system has become progressively less resilient.
Not because the Strait has suddenly become more important. It has always been one of the world’s most strategically important energy corridors. What has changed is the market’s ability to absorb another disruption.
The first shock was cushioned by alternative pipeline capacity, inventory drawdowns and expectations that shipping would eventually resume. Roughly one-third of the crude oil that normally flowed through the Strait was successfully redirected through regional pipeline infrastructure, while commercial inventories were drawn down to fill much of the remaining gap.
Months later, much of that cushion has disappeared. Commercial OECD oil inventories now sit at their lowest levels in recent history. In fact, inventory levels this low have historically been associated with oil prices closer to US$120 per barrel, underscoring how dependent today’s market has become on the assumption that supply disruptions remain temporary.
The market is no longer deciding whether geopolitical risk exists.
It is deciding how much of that risk to price.
Today, options markets suggest investors still expect Brent crude to trade around US$75 per barrel three months from now, only modestly above the roughly US$70 expectation at the beginning of the month. What has changed is not the market’s base case. It is the probability investors assign to a much larger price spike if the disruption proves more persistent than expected.
That may prove to be the correct assessment.
But if it is wrong, the economic and investment consequences would likely be far greater than they were during the initial shock.
This is not a prediction.
It is a risk management discussion.
The real risk is not the Strait. It is what comes after.
The Strait of Hormuz remains one of the world’s most important energy chokepoints, carrying roughly one-fifth of global oil consumption.
But the investment story is no longer about geography.
It is about inventories.
Earlier this year, inventories acted as the market’s shock absorber. Governments released strategic reserves, commercial inventories declined and alternative transportation routes partially offset lost supply. Those adjustments prevented a much larger spike in oil prices. Inventories, however, cannot be drawn down indefinitely.
The market’s remaining safety valves are becoming less certain as well. Following the initial disruption, Saudi Arabia redirected a significant portion of its crude exports through its East-West pipeline to the Red Sea, with shipments from the Yanbu terminal rising to roughly 4 million barrels per day, equivalent to about 60% of the country’s pre-war crude exports and approximately 6% of global oil exports. New threats against the Bab el-Mandeb Strait now raise the possibility that even these alternative routes become less reliable, further reducing the market’s ability to absorb another prolonged disruption.
If the Strait remains effectively closed for an extended period, oil markets could reach a tipping point where depleted inventories are no longer sufficient to offset disrupted supply. At that point, prices would no longer be determined by temporary disruptions but by genuine scarcity as buyers compete for increasingly limited supply.
That is precisely the type of asymmetric risk long-term investors should pay attention to. If both the Strait of Hormuz and the Bab el-Mandeb Strait were disrupted simultaneously, the additional tightening in global oil supply could add a further US$15-20 per barrel to Brent crude in the near term. More importantly, it would bring forward the tipping point where depleted inventories are no longer sufficient to stabilize the market. The most likely outcome has changed very little. The consequences of being wrong have increased materially.
Higher oil prices rarely remain an energy story
If energy prices were to rise sharply again, the consequences would extend well beyond gasoline prices.
Higher energy costs reduce consumers’ purchasing power, increase transportation and production costs, and eventually work their way into broader inflation. Growth slows as households and businesses pull back, while inflation remains elevated. That combination creates one of the most challenging environments for both policymakers and investors.
Our adverse scenario research quantifies the potential magnitude of that risk. Brent crude rises from approximately US$84 to US$150 per barrel, inflation across developed markets moves back toward 5%, U.S. economic growth slows toward 1%, and the eurozone comes close to recession. Central banks, expecting to gradually normalize policy, could instead find themselves considering additional interest rate increases despite weakening economic activity.
Importantly, this would not simply be a repeat of 2022.
Labour markets across many developed economies have softened, making broad wage-price spirals less likely. Even so, another sustained energy shock could still delay or reverse the interest rate relief that many investors currently expect.
Ironically, some of the largest economic losers could be the Gulf economies themselves. Higher oil prices cannot fully offset the economic damage when exports are physically unable to reach global markets. It is another reminder that geopolitical shocks rarely produce the simple winners and losers investors often expect.
What does this mean for Canadian investors?
Canada occupies a unique position.
Higher oil prices would support parts of the Canadian economy, particularly energy producers and government revenues. That has led many investors to conclude that Canada naturally benefits whenever oil prices rise.
The reality is more complicated.
Canadian investors do not own the Canadian economy.
They own diversified portfolios.
Higher gasoline prices still reduce household purchasing power. Businesses still face higher transportation and operating costs. Persistent inflation could still influence the path of Canadian interest rates and borrowing costs. While Canada’s energy sector may benefit, other parts of the market could experience slower earnings growth as economic activity weakens.
This is another reminder that geography alone is not diversification. Diversification comes from owning businesses, sectors and asset classes that respond differently to changing economic conditions.
How we are positioned at Canada Life Investment Management
Only weeks ago, our outlook anticipated that as energy markets normalized, domestic economic fundamentals would once again become the primary driver of global markets. The renewed closure of the Strait does not change our base case, but it does remind us that geopolitical risks have not disappeared. They remain an important alternative scenario that investors cannot ignore.
Our portfolios are not positioned for one specific geopolitical outcome.
They are designed to remain resilient across a wide range of economic scenarios.
That begins with global diversification. We continue to favour broad exposure across regions rather than relying on any single economy or market leadership theme.
Within equities, we maintain our preference for high-quality businesses that we believe are better positioned to navigate periods of economic uncertainty. Our current asset allocation continues to favour U.S. equities while remaining underweight Canada.
High-quality fixed income continues to play an important role as a source of portfolio stability, even in an environment where inflation risks remain elevated.
We also continue to utilize liquid alternative strategies that have the potential to generate crisis alpha and provide diversification when traditional asset classes become increasingly correlated during periods of market stress.
Finally, our exposure to real assets, including select real estate and infrastructure-related investments, provides an additional source of diversification as portfolios navigate an increasingly uncertain geopolitical and inflation backdrop.
None of these positioning decisions depend on forecasting whether the Strait remains closed for another week or another month.
They reflect a broader philosophy that resilient portfolios should be prepared for a range of possible outcomes rather than a single expected outcome.
The investment lesson
Markets may once again prove correct that this disruption will be temporary.
We hope they are.
But successful investing has never been about predicting every geopolitical event correctly. It is about recognizing when risks become asymmetric and ensuring portfolios are prepared for outcomes that markets may not fully anticipate.
Today, the greatest risk is not simply another disruption to energy supplies. It is that the global energy system has become progressively less resilient. Inventories have been depleted, alternative export routes are becoming more vulnerable, and the margin for error has narrowed considerably. That does not make a prolonged disruption inevitable. It does make the consequences of one significantly greater.
That is why we continue to view this as a risk management story, not a prediction.
Our responsibility is not to forecast the next headline.
It is to build portfolios with the objective of improving resilience across a wide range of economic and market environments.
Sincerely,
Corrado Tiralongo (he/him)
Vice President, Asset Allocation & Chief Investment Officer
Canada Life Investment Management Ltd.