CIBC: Persian Gulf Stalemate Keeps Oil Outlook Highly Uncertain - FJElite

Active fighting has largely stopped and oil volatility has eased, but the range of plausible outcomes is now wider. Iran appears willing to hold out for better terms, while the US has shown little willingness to meet those demands, leaving no clear timetable for a full reopening of the Strait of Hormuz. The base case remains closer to a resolution within months rather than years, but Gulf states are already spending heavily on alternative export routes, suggesting they are also preparing for a prolonged disruption.

Current oil prices may understate the risks. If a deal is reached, crude could fall toward $70 or lower, but if the Strait remains threatened, prices could move into triple digits. SPR drawdowns are becoming less effective, while refinery disruptions have already pushed US gasoline above $4 a gallon. The main uncertainty is how long higher energy costs persist and how much they spill into core inflation.

For monetary policy, the risk is greater in the US than Canada because the US labour market is tighter and core inflation is already around 3%. A return to headline inflation above 4% alongside firmer core inflation would make it harder for the Fed to stay on hold. That risk is unlikely to be decisive by September, and the base case remains that oil inflation cools enough for the Fed to stay on hold this year, but confidence in that outcome remains low.