The adverse scenario is no longer a distant risk
Corrado Tiralongo - May 22, 2026
The market is still treating the closure of the Strait of Hormuz as a disruption that can be absorbed. That may prove correct, but the window for that outcome is narrowing. The issue is no longer just the conflict itself.
Market Commentary — May 19, 2026
The adverse scenario is no longer a distant risk
The market is still treating the closure of the Strait of Hormuz as a disruption that can be absorbed. That may prove correct, but the window for that outcome is narrowing.
The issue is no longer just the conflict itself. The fighting has eased, but the Strait remains effectively closed. Energy markets can absorb short disruptions through inventories, rerouted supply and strategic reserve releases. They cannot absorb an indefinite loss of one of the world’s most important energy transit routes without forcing a sharper adjustment in prices, demand or both.
For now, oil prices remain high, but not disorderly. Brent has been trading around $110 per barrel, which points to a tighter market, not a market in full crisis. That is the uncomfortable part. Prices are still close enough to baseline assumptions that investors can look through the disruption.
Commercial oil inventories are being drawn down. The buffers that helped the market absorb the first phase of the shock are not permanent. China has also contributed as imports slowed, but these are bridges, not foundations.
If inventories are still falling, demand is still exceeding available supply.
Inventories are the transmission path
The market debate has focused heavily on oil prices. That is understandable. Prices are visible and shape the headlines.
But prices are the outcome. Inventories are the transmission path.
If OECD inventories continue to decline at the recent pace, they could reach critically low levels by the end of June. That could push Brent toward $130–$140 per barrel or higher.
The adverse scenario should now be assessed in weeks, not months. Markets can tolerate disruption only when supply normalization is expected before inventories become scarce.
The political constraint has become the market constraint
The economic issue is being driven by a political impasse. Iran appears to view control of the Strait as leverage, while the U.S. seeks constraints on Iran’s nuclear program.
A quick reopening remains possible, but is becoming harder to assume. Markets still appear to be pricing in eventual normalization. If that does not occur, prices may adjust quickly.
Markets look calm, but not clean
Equity markets appear resilient, with U.S. indices near highs and volatility lower. However, underlying signals suggest discomfort.
The rally has been uneven. Dispersion has increased and investors appear to be both chasing upside and hedging downside risk simultaneously.
This suggests markets are less comfortable than headline indices imply.
The growth risk is not yet fully priced
The first phase of the shock has been inflationary. Growth damage has so far been limited.
However, consumer confidence has weakened, hiring has softened and industrial output has declined in some regions. The early signs of strain are visible.
The inflation effect is also spreading beyond fuel into transportation, food and services.
Central banks may need to respond if inflation expectations rise, even though they cannot directly affect energy supply.
What the adverse scenario could look like
In the adverse scenario, global oil exports decline by nearly 10%, LNG exports fall, and Brent rises to around $130 before easing.
This would likely lead to stagflation: higher inflation combined with weaker growth. Europe and Asia would be more vulnerable, while global growth could turn negative.
Policy responses would become more difficult, potentially leading to tighter financial conditions during a slowdown.
Canada’s offset is real, but incomplete
Canada benefits from higher energy prices through improved terms of trade, but households feel the cost immediately.
Confidence has weakened, spending is at risk, and inflation may rise again.
The Bank of Canada may face a difficult balance between weak growth and rising inflation risks.
Portfolio positioning
This environment supports diversification and resilience rather than betting on a single outcome.
A reopening of the Strait would lower risks, while a prolonged closure would increase inflation and growth risks.
Portfolios emphasize quality equities, diversified fixed income and alternative strategies to reduce reliance on any single scenario.
The goal is not to predict outcomes, but to avoid overdependence on a benign resolution.
Conclusion
The key question is no longer whether the Strait matters, but how long before inventory depletion forces a sharper adjustment. The answer may be measured in weeks.
Corrado Tiralongo
Vice President, Asset Allocation & Chief Investment Officer
Canada Life Investment Management Ltd.