From bad to worse

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   By Guest Blogger Ryan Lewenza

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For months, I’ve been stressing the importance of oil prices and the risks surrounding the U.S./Iran war. Oil is the grease that keeps the global economy moving, touching nearly every aspect of economic activity and our daily lives. Whether it’s filling up your tank, booking a flight to Mexico, buying groceries, or even the mortgage rate you pay, oil prices have a direct and indirect impact on all of it.

With WTI crude surging 4% to $106/barrel this week and U.S. oil prices up 58% since July 1, there is growing concern that inflation could begin to accelerate again. If that occurs, the Federal Reserve and other central banks could be forced to begin hiking rates again, increasing the risk to economic growth and financial markets.

US oil prices have surged since the summer and approaching spring highs

Source: Stockcharts.com, Turner Investments

Why are oil prices surging?

The answer is straightforward: this unnecessary war has disrupted some of the world’s most critical oil transportation routes.

By now, everyone knows of the Strait of Hormuz, one of the most important oil chokepoints in the world. Prior to the conflict, roughly 20 million barrels of oil and petroleum products per day flowed through the Strait, representing approximately 20% of global oil supply. Now, with Iran restricting traffic through the use of sea mines and drones, tanker traffic has slowed to a crawl. While a small number of ships are still getting through, volumes are only a fraction of what they were before the war.

But that’s only part of the story.

In Yemen, where the Houthis control roughly 30% of the country, recent military gains have expanded their influence, particularly near the Bab el-Mandeb Strait, a strategically important passage connecting the Red Sea to the Gulf of Aden. Just last week, they captured Mayun Island, which sits directly within this critical waterway, giving them greater influence over a key global shipping route.

As a result, Iran exerts significant control over the Strait of Hormuz, while the Houthis have increased their influence around the Bab el-Mandeb Strait. Together, these two chokepoints normally handle roughly 30 million barrels (bls) of oil per day, making any disruption a significant threat to global energy markets.

Main maritime shipping routes and chokepoints

Source: TBS

Finally, over the weekend, a critical Saudi Arabian oil pipeline that transports approximately 5 million bls/day oil per day was struck by a drone attack, causing significant damage and potentially taking the pipeline offline for weeks.

As a result, this increasingly destructive conflict has severely disrupted global oil supplies, with conditions continuing to deteriorate and little indication of a near-term resolution. The key concern is that sustained high energy prices could begin to erode demand while simultaneously fueling inflationary pressures. This could force central banks to maintain higher interest rates for longer, weighing on economic growth and increasing the risk of a recession.

In the U.S., average gasoline prices have climbed to approximately US$4.50/gal, up from roughly US$3.00 before the conflict. Even more concerning is the rise in diesel prices, which have surged to record highs above US$6.00/gal, compared to about US$3.50 before the war.

While higher gasoline prices will likely weigh on consumer spending, diesel prices pose an even greater economic risk. Diesel is the fuel that powers the physical economy, from trucks and trains transporting goods, to the agricultural sector that supports food production, and the construction and mining industries that rely heavily on diesel-powered equipment. As a result, rising diesel costs can ripple throughout the economy, driving up the price of goods and adding further inflationary pressure. In turn, this could prompt central banks to keep interest rates higher for longer.

Just this week, the Federal Reserve raised its policy rate by 25 basis points to 3.75%-4.00%, marking its first rate increase since 2023. Additional hikes may still be on the horizon. If the conflict persists and key shipping routes remain disrupted, oil prices could move significantly higher, further fueling inflation and increasing the likelihood of additional monetary tightening.
Since rising interest rates are one of the primary catalysts for economic slowdowns and market weakness, this represents a growing risk for investors. This is one of the key reasons we have begun reducing portfolio risk by increasing exposure to more defensive sectors, such as utilities, while also adding to our bond holdings.

For now, the best course of action is to monitor developments closely. We remain hopeful that tensions will ease and that critical supply routes will gradually reopen, helping to stabilize energy markets and reduce inflationary pressures.

US gasoline and diesel prices have surged due to war

Source: EIA

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Investment Advisor, Private Client Group, of Raymond James Ltd.

Source: https://www.greaterfool.ca/2026/09/19/from-bad-to-worse/