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Iran’s oil exports account for less than 2 per cent of global demand – and are largely shipped to China – while the rest of the world is currently blessed with excess capacity.Jeff McIntosh/The Canadian Press

Investors initially reacted to Israel’s attack on Iran with a shrug, but they are now taking a more worried approach that is lifting the prospects for Canadian energy stocks.

The price of crude oil rallied 4.7 per cent on Tuesday afternoon, to US$73.52 a barrel. That’s the highest price for West Texas Intermediate, the U.S. benchmark for crude, since January.

Energy stocks are also moving. The S&P/TSX energy index gained about 1.7 per cent on Tuesday, even as major equity indexes declined. The energy sector is close to its highest level of the year.

If that sounds like a delayed reaction to the latest outbreak of violence in the Middle East, it is.

Though stocks fell and oil rose after Israel’s first round of surprise attacks last week, many observers expected that the impact on energy markets would be limited.

The reasoning: Iran’s oil exports account for less than 2 per cent of global demand – and are largely shipped to China – while the rest of the world is currently blessed with excess capacity.

That view led to a far more subdued market response at the start of this week, when stocks recovered and the price of oil declined on Monday.

Opinion: The Israel-Iran war has, so far, not sent oil prices soaring. That could change

“At this stage, there is very limited to no impact on oil output and exports, so [Friday’s] rally largely reflects a rising risk premium to account for potential production and export disruptions,” Max Layton, an analyst at Citigroup, said in a note on Monday.

There is also the argument that the conflict could lead to lower oil prices over the longer term if, say, there is a regime change in Iran or the current regime strikes a quick deal with the United States to end its nuclear ambitions.

The benign case for energy markets is losing some ground, though, as the conflict persists and the United States appears to be taking a more active role with Israel.

“The intensification of Middle East tensions comes at a tricky time for investors. Adding geopolitical risk to the uncertainty around U.S. trade and fiscal policy makes an unpredictable environment even more so,” Jonas Goltermann, deputy chief markets economist at Capital Economics, said in a note.

On social media on Tuesday afternoon, U.S. President Donald Trump called for Iran’s “unconditional surrender” and suggested that the country’s Supreme Leader is “an easy target” – possibly reducing the chances for a negotiated end to the conflict.

Also on Tuesday, two oil tankers collided and caught fire near the Strait of Hormuz, where roughly 20 million barrels of crude oil and oil products are shipped daily, on average.

The collision raises concerns that electronic interference in the region is affecting the navigation systems that ships rely upon, and could add a significant hurdle to exports.

Opinion: Investors unnerved as Israel-Iran conflict fuels turmoil in oil markets

“Risks extend in both directions,” Eric Lascelles, chief economist at RBC Global Asset Management, said in a note.

He added: “It’s entirely possible that the conflict ebbs and oil prices accordingly retreat back into the US$60s. But if the war were to broaden across the Middle East, or Iran were to shut down the Strait of Hormuz, the oil price increase could be vastly greater.”

Markets are now entertaining a darker scenario. The CBOE VIX Volatility Index, a measure of investor anxiety, surged 13.2 per cent on Tuesday afternoon, while the S&P 500 retreated toward Friday’s low.

And then there’s oil.

Despite its gains, the price of crude remains relatively low compared with rallies in recent years, when it soared above US$80 a barrel near the start of 2025, US$93 in 2023 and US$123 in 2022.

Though the current rally isn’t exceptional, these previous heights suggest that oil prices have plenty of room to rise should the conflict – and the uncertainty it generates – persist.

“Friday’s hostilities marked the most significant Middle Eastern conflict since the major wars of 1967 and 1973,” Jack Ablin, chief investment officer at Cresset Asset Management, said in a note.

“We are attempting to assess whether it will result in a positive outcome, like Iranian democratization, or negative consequences like prolonged regional instability,” Mr. Ablin said.