OIL Price Update – March 2026

Oil price volatility reaches a crescendo on Monday, March 9

Global investment market volatility reached a new crescendo on Monday, March 9, (Australian time) as the oil price (West Texas Intermediate – WTI) rose extremely sharply. The key WTI futures price reached almost USD120 (up from USD70 at end February) early Monday afternoon (east coast Australian time) due to fears that oil supply through the key Strait of Hormuz might be halted for an extended period.

Highlighting the volatility, the oil price retreated to around USD100 by the close on Monday after US President Trump suggested that the war was “very complete, pretty much“, and has retreated further during the Tuesday trading day and into Wednesday morning trading.

Negatively impacted equities, bonds and the Australian dollar

The impact of the oil price spike on Monday was swift and brutal, causing the Australian share market (ASX 200) to fall by 2.85% on the day, while causing local bond yields to spike higher on inflation fears (10 year yield up around 0.10% and the policy-sensitive 3-year bond up 0.13%).

The Australian Dollar (AUD) was also impacted by the oil market volatility – after opening in early Monday morning trade at around USD 0.7020, the AUD fell to USD 0.6960 around midday, but has now more than recovered its loss in subsequent trading days.

This volatility highlights that the oil price is the key market and economic risk from the Middle East war, with the war’s duration and its impact on oil supplies key.

Higher oil prices have a two-fold negative impact on the economy

Higher oil prices have a two-fold impact on the global economy – negatively impacting growth prospects and driving inflation pressures higher (“stagflation”). Over the short term, higher oil prices act like a “tax” on consumers and businesses, so reducing consumer and corporate spending, with the uncertainty accompanying oil price volatility also acting to impede decision-making.

Higher oil prices can also impact Inflation (as measured by the CPI) via the flow-through of higher transportation costs and petrol prices but, more importantly, can affect inflation “expectations” – consumers’ expectations for inflation pressures over the outlook period. Changes in inflation expectations play a very real role in conditioning consumers to expect a certain level of inflation pressure, and higher inflation expectations can be self-fulfilling.

What are investors currently expecting

By observing a range of market variables, we can get a sense of how investors are expecting the situation in the Middle East to impact the global economy.

Oil prices – slightly higher “risk” spread implied in pricing

By observing oil futures prices we can see what type of price scenario investors are expecting. The April 2026 WTI futures contract (the current benchmark contract) shows that oil prices are expected to remain elevated for a few months at least with this contract currently trading at around USD87 – up from USD70 at end February, but significantly lower than the recent peak near USD120 reached on Monday.

Longer-dated futures (December 2026) show oil trading around USD70 – again significantly lower than the peak reached on Monday, but up from around USD 60 where this contract was trading at the start of the year. This price pattern suggests that market participants are now pricing a “risk” spread over the medium term of around USD10 compared with the pricing that prevailed at the end of 2025.

Crude Oil – West Texas Intermediate (April 2026 and December 2026 Futures Contracts)

Source: Bloomberg

Growth expectations – little changed according to the copper price

Observing the copper price is one way to gauge any change in investors’ global growth expectations. With copper having a pivotal role in a range of industrial applications, changes in its price are regarded as a measure of changing investor’ growth sentiment. From the chart below we can see that the copper price has changed very little over the past few weeks, suggesting that growth expectations have similarly moved very little. With the global economy far less oil-intensive today than in the 1970s it is to be expected that any adverse change in the oil price would be likely to have less impact on global growth today than in the past.

Copper prices (May 2026 futures contract)

Source: Bloomberg

Inflation expectations have moved slightly higher (according to bond market pricing)

As revealed by US bond market pricing, inflation expectations have moved only slightly higher since end February:

• implied US inflation over the next two years has moved from an expected 2.80% as at the end of February to 3.00% currently,
• implied US inflation over the next five years has moved from 2.45% to 2.60%,
• implied US inflation over the next ten years has moved from 2.25% to 2.35%

Interestingly, moves in Australian inflation expectations have been even less than those recorded in the US. As revealed by Australian bond market pricing, since end-February:

• implied Australian inflation over the next five years has moved from 2.57% to 2.69%
• implied Australian inflation over the next ten years has moved from 2.29% to 2.34%

US 2-year Implied Inflation (“break-even” inflation)

Source: Bloomberg

The outlook

By observing the market variables noted above, we can get a sense of what investors currently expect the impact of the Middle East war to be. At this stage, investors appear to have priced a relatively short-lasting conflict, with only limited expected impact on growth and inflation. The key risk is therefore if the conflict were to broaden and last for longer than a few weeks. Such an outcome would be expected to have very negative price impacts on both equity and bond markets.

We clearly have no unique insight into how the situation will develop but there seems to be a range of potential market outcomes, based on the duration and the magnitude of the conflict and the resulting impact on oil supplies and the oil price.

Historically, geopolitical events have had only a short-lived influence on markets and economies, but the oil price impact will be key.  With investors seemingly expecting a relatively short war, a longer-lasting conflict and a sustained higher oil price would have clear inflation and recession risks – “stagflation”. And these downside risks do not appear to be fully priced.

We remain cautious about the market outlook, mainly due to the elevated level of global market valuations and the associated extent of market optimism. The Middle East situation only makes the outlook more subject to downside risk. We noted last month that, given the majority of investors began the year seeing only upside – for growth, for equity earnings and for the extent of US central bank rate cuts – the risk of disappointment is not insignificant.

We remain cautious, but not significantly underweight – we are looking for opportunities to invest in high quality companies that have been “unfairly” treated by the market during the current period of volatility.

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