Good morning. Oil prices shot past US$100 a barrel for the first time since Russia invaded Ukraine, driven by fears of prolonged supply disruptions caused by the escalating conflict in the Middle East. How that complicates the road ahead for policy makers and consumers is in focus today.
Up first
In the news
Iran: The war is upending Ottawa’s push to tap into Middle East investment pools.
Resources: Conflict in Persian Gulf is threatening essential desalinated water supply.
Government spending: Ottawa is expected to nominate senior public servant Annette Ryan as the next parliamentary budget officer.
Plumes of smoke rise over oil depot tanks hit by joint Israel-U.S. strikes overnight near Tehran.Hossein Esmaeili/The Globe and Mail
In focus
Barrelling through chaos
1. Supply concerns outpace risk: Oil prices surged in Asian markets this morning, sending Brent to about US$117 a barrel and the West Texas Intermediate to nearly US$116 as traders sized up the weekend’s escalation.
Iran announced that its ruling assembly of clerics chose the hardline son of Ali Khamenei as the country’s next supreme leader, and said a large-scale attack this weekend on the country’s oil-storage facilities marked a “dangerous new phase” of the conflict.
Brent – a North Sea crude blend named after a Shell oilfield – is the global benchmark for seaborne oil and reacts sharply to geopolitical risks that threaten shipping routes. It jumped last week after U.S. President Donald Trump demanded “unconditional surrender” from Tehran and Israel carried out strikes on Iranian energy infrastructure.
But as Tehran vows to fight back, and oil from the Gulf states is blocked from passage through a major global supply corridor, investors sought to lock in prices of WTI, the U.S. crude benchmark that is used to price much of the oil produced and traded across North America.
As panic grew over the Middle East, investors seeking safety bid up the price of WTI even faster than they priced in the risk of buying Brent, causing the “spread” between the two prices to narrow to almost nothing.
In most geopolitical conflicts, Brent tends to spike more sharply than WTI, which is cushioned by the relative security of the U.S. storage and supply system. Those gains usually ease once investors see signs of resolution. In Iran, investors might be waiting a while.
2. The effects on prices across Canada: With some economists now predicting another jump in oil prices after they crested the psychologically significant US$100 mark, worries are settling in over how they will weigh on businesses, consumers and global economic growth.
France said it planned to host a meeting of G7 finance ministers today to assess a potential response.
“In a conflict which is currently a local conflict in one region but has global repercussions, it is obviously essential that we co-ordinate,” said Roland Lescure, the French Economy and Finance Minister.
Even a short spike could weigh on the global outlook, economists say, and the conflict has already reduced the odds of central bank cuts around the world.
Canadian consumers are already paying the price of higher oil at the pumps, and will be feeling it with more expensive heating bills. The oil-producing provinces of Alberta, Saskatchewan and Newfoundland and Labrador will be somewhat shielded, BMO chief economist Douglas Porter wrote in a note to clients on Friday, but the rest of the country will be dealing with higher headline inflation and downward pressure on growth.
Energy accounts for almost 6 per cent of Canada’s consumer price index, meaning even a temporary 30-per-cent jump in energy costs can make big waves on headline inflation.
“And, unfortunately, investors are gradually coming to the view that the conflict and the upswing in prices may be something more than temporary.”
The February Labour Force Survey on Friday is expected to show Canada’s unemployment rate ticked up, and the international merchandise trade report on Thursday is expected to show both exports and imports slowed in January.
3. Back to the table: This isn’t the backdrop Canada wants as energy costs rise, and as it renews trade talks with Washington. One optimistic view of Dominic LeBlanc’s return to Washington after a four-month break in negotiations is that the Trump administration might want to announce a big win to balm the sting of higher oil prices. “Trump secures more access to Canada’s dairy market!” a headline might say. Let them drink milk!
Another view is that the federal minister in charge of Canada-U.S. trade is back on the White House’s radar simply owing to the logistics of organizing a mandated review of the United States-Mexico-Canada agreement, which is now almost 100 days away. I’ve had my Outlook calendar attacked by meeting requests on a similar timetable for far less than one of the world’s largest free-trade agreements.
During a recent news conference, Prime Minister Mark Carney said the USCMA trade pact, sometimes called CUSMA in Canada, “effectively has been broken in the short term” by Trump’s imposition of tariffs on Canadian autos, steel and aluminum.
Ottawa is looking to the USMCA review as a process to “re-establish the trust” between the two governments, as well as businesses and investors on both sides of the border, Carney said.
4. Meeting in the middle: The Prime Minister is returning from a globe-spanning trip in which he secured major strategic partnerships with India, Japan, South Korea and Australia – potentially lucrative markets with mutual geopolitical concerns.
Canada has long had substantive trade agreements in place with these regions, but the new announcements account for a world in which the U.S. is throwing up economic walls even as it aims to assert its military dominance.
This growing tension, which has led Carney to call on “middle powers” to form a bloc that would stand up to the bully tactics of larger economies, is at the centre of concerns from NATO allies and much of the Western world.
Trade with the U.S. remains important for Japan, India and South Korea, whose leaders are seeking out ways to offset the loss of free access to the world’s largest market. For Canada, however, it’s existential.
In India, economics reporter Mark Rendell writes, the Prime Minister worked on getting Canadian uranium into Indian nuclear reactors, more Canadian code into Indian software systems and more Canadian-branded coffee into India’s rapidly growing middle class.
5. Also on our radar: Canadian tech giant Constellation Software is holding its first earnings call since 2018 this morning.
U.S. inflation reports, including the consumer price index on Wednesday and the Federal Reserve’s preferred core personal‑consumption measure on Friday, already weren’t expected to look reassuring. But they cover a period before the attack on Iran, which has since sent fuel costs higher. Fed chair Jerome Powell is widely expected to keep interest rates unchanged at the central bank’s meeting on March 18. Expect posts on Truth Social.
China follows its inflation report today with trade figures tomorrow, after setting its lowest economic growth target since 1991 at the opening of its annual national congress. Economists interpreted its projection of about 4 per cent to reflect pragmatism in the face of a weak domestic economy. Friday brings a heavy slate of European sovereign rating reviews, including for Germany, Italy and Spain.
With a file from Reuters
Quoted
They’re going to have to change an awful lot. When you see a Harley coming toward you, you see a guy with a big grey beard.
— Chris Abraham, former motorcyclist
Can Harley-Davidson pull a U-turn as sales decline and its main demographic stops riding?
Morning update
Global markets slumped as surging oil prices exacerbated inflation worries with the U.S.- Israeli war on Iran showing no signs of slowing down.
Wall Street futures were in the red after major North American markets closed sharply down on Friday. TSX futures followed sentiment lower.
Overseas, the pan-European STOXX 600 was down 1.85 per cent in morning trading. Britain’s FTSE 100 declined 1.22 per cent, Germany’s DAX slid 1.71 per cent and France’s CAC 40 gave back 2.1 per cent.
In Asia, Japan’s Nikkei closed 5.2 per cent lower, while Hong Kong’s Hang Seng fell 1.35 per cent.
The Canadian dollar traded at 73.87 U.S. cents.