Iran Conflict Oil Spike Keeps Canadian Gas Prices Elevated

Crude oil markets endured one of their most volatile trading weeks of 2026 between May 3 and May 7 as the ongoing U.S.-Iran conflict, disruptions to the Strait of Hormuz and a series of diplomatic feints sent prices on a roller-coaster ride. West Texas Intermediate futures swung between a peak of $107.46 and a trough of $88.66 before settling near $97 a barrel by the end of the week, with international benchmark Brent crude closing around $109.87. For Canada, the result has been higher gasoline prices at the pump, intensified inflation pressure on consumer goods and a fresh complication for the Bank of Canada as it weighs its next interest rate decision.

The oil supply shock is the most consequential geopolitical event of the year for the Canadian economy. As a major producer, the country benefits from elevated world prices through royalty revenues in Alberta and Saskatchewan and through earnings at its largest energy firms. As an importer of refined products in parts of central and Atlantic Canada, however, the country also bears the cost of higher fuel prices that ripple through transportation, food production and household budgets.

What drove the swings

The most important factor behind the early-week rally was the continued partial closure of the Strait of Hormuz, the narrow waterway through which roughly 20 per cent of global seaborne crude oil typically passes. Operational restrictions imposed by various parties to the conflict, along with insurance market reactions to security risks, created the supply uncertainty that pushed prices toward annual highs.

Brent crude futures fell about 4 per cent on Wednesday and Thursday to close at $109.87 per barrel, while WTI futures lost nearly 4 per cent to settle at $102.27. Those declines came on news that the U.S. and Iran were close to a one-page, 14-point memorandum of understanding that would end the conflict and re-open shipping through the strait. Sources speaking to American media said the framework would lift the most aggressive restrictions on commercial traffic while providing a structure for further negotiations on the underlying disputes.

The diplomatic breakthrough was tempered by President Donald Trump's warning that Iran would be blown off the face of the earth if it targeted U.S. ships safeguarding commercial traffic through the strait. That rhetoric reminded markets that the underlying conflict remains unresolved and that any framework agreement could collapse under renewed military pressure.

What it means at the pump

Canadian retail gasoline prices have climbed in line with crude prices through the spring, with the national average price approaching $1.80 per litre in early May. Specific markets have seen sharper movements: Toronto and Vancouver retail prices have spent significant stretches above $1.85 per litre, while interior British Columbia communities reliant on a single supplier have at times paid above $1.95.

Diesel prices have moved roughly in parallel, a particularly significant factor for the agricultural sector heading into seeding season in the prairies. Trucking and logistics costs have absorbed much of the increase, with effects that show up in grocery prices several weeks downstream.

For households, the impact has been pronounced. Statistics Canada's March CPI report showed gasoline prices contributing significantly to the 2.4 per cent headline inflation reading, and the April report due May 20 is expected to show further upward pressure. The Bank of Canada has been clear that it views the energy-driven inflation as largely temporary, but the cumulative effect on household budgets has been real and lasting.

The Bank of Canada's dilemma

Governor Tiff Macklem and the governing council held the policy rate at 2.25 per cent at the end of April and signalled that only small policy moves are likely in the near term. The combination of weakening labour market data and rising energy-driven inflation has put the Bank in an unusually difficult position.

If the central bank cuts rates in response to job losses, it risks reinforcing the inflation upside from oil. If it holds or hikes in response to inflation, it risks deepening the labour market damage. The Bank's preference has been to look through temporary supply-side price shocks while paying close attention to whether inflation expectations remain anchored. The May 20 CPI release and the June 5 jobs report will be the next major signals.

Economists at major banks have begun to fracture in their forecasts. CIBC Capital Markets has argued that the Bank can cut once before assessing the energy-driven inflation passthrough more fully. TD Economics has urged the council to hold steady through the summer to avoid stoking longer-term inflation. The Bank's June 10 announcement will offer the next concrete data point on which view is prevailing internally.

The Alberta and Saskatchewan windfall

The other side of the oil-price coin is the boost to Canadian producing provinces. Alberta's royalty revenue, the largest single source of provincial own-source revenue outside taxation, is sensitive to crude oil prices and to the differential between Canadian heavy oil and benchmark West Texas Intermediate. Both have been favourable for provincial coffers this spring.

Premier Danielle Smith's government has signalled that elevated oil prices will allow Alberta to run a smaller deficit than its budget originally anticipated, provided current prices hold through the fiscal year. The provincial savings account, the Alberta Heritage Savings Trust Fund, is also expected to benefit from higher year-end transfers.

Saskatchewan, which produces a different mix of crude oil and which has greater exposure to potash and uranium markets, has seen similar benefits. The province's economic indicators have outperformed expectations through the spring, and the projected fiscal outlook for the year ahead has improved.

The Atlantic and Quebec consumer side

The flip side of the energy story plays out in eastern Canada, where consumers and businesses absorb higher costs without an offsetting royalty windfall. Quebec, Ontario and the Atlantic provinces all rely heavily on refined petroleum products produced from a combination of domestic and imported crude, with significant volumes flowing through pipelines and rail rather than seaborne shipping.

The Irving refinery in Saint John, New Brunswick, the largest in Canada, is a major source of refined product for the Atlantic provinces and parts of Quebec. Its operations have been steady through the spring, although input costs have risen in line with global crude markets. The refinery's pricing decisions have been the focus of intermittent political attention, particularly in New Brunswick where retail prices have been among the highest in the country.

Federal carbon pricing on fuels continues to apply across the provinces that have not implemented their own equivalent systems. The Carney government has held the line on the consumer-facing component of carbon pricing despite political pressure, arguing that the offsetting Climate Action Incentive rebate continues to put most households ahead on a net basis.

The strategic question for energy policy

The Iran-driven oil shock has reinforced ongoing debates about Canada's energy infrastructure. Advocates of expanded pipeline capacity, including Alberta Premier Danielle Smith, have pointed to the conflict as evidence that Canada needs more domestic infrastructure to handle production and export. Critics have argued that the volatility of fossil fuel markets only underscores the case for accelerating the transition to renewable energy and electric transport.

The Carney government has positioned itself between those poles, supporting both pipeline development and ambitious clean energy investment. The proposed memorandum of understanding with Alberta on a new bitumen pipeline, currently in advanced negotiation, fits the first track. The fast-track approval of LNG Canada Phase 2 and the Darlington small modular nuclear reactor fits the second.

Federal energy ministers have also emphasised the importance of refining capacity, particularly in central and eastern Canada, where reliance on imported refined products leaves consumers exposed to global market swings. The political appetite for new refinery construction remains limited, however, given the long permitting timelines and the projected demand trajectory for petroleum products.

What's next

The most important variable in the near term is whether the U.S.-Iran framework announced in early May translates into a durable de-escalation. If the Strait of Hormuz returns to full commercial operation and the conflict cools, crude prices are likely to ease toward the mid-$80s through the summer. If the conflict re-escalates, prices could move toward the $110 to $120 range, with potentially severe inflationary consequences for Canada and other oil-importing economies.

The Bank of Canada's June 10 decision will provide a clearer signal of how the central bank is balancing the competing pressures. The April CPI report on May 20 will set the stage for that decision. The May jobs report on June 5 will round out the data picture before the council meets.

For Canadian consumers, the practical guidance remains modest: monitor gasoline prices in your local market, lock in transportation costs where possible if you operate a small business, and brace for some lingering inflation pressure in grocery and transportation categories through the next several months. The energy shock is real, but the diplomatic track that could resolve it is also moving, and the second half of 2026 may look meaningfully different from the first.