Canada’s oil and gas sector is smaller than a decade ago, but it still supports output and trade. In 2025 it accounts for 6.6% of GDP and 15% of total goods exports. Higher oil prices raise fuel costs and can reduce household spending power. At the same time, they increase corporate profits and government natural resource royalties.

How Higher Oil Prices Feed Into Inflation

Beyond fuel, higher energy prices can lift costs for items such as packaging and fertiliser across many industries. These effects tend to build only if oil prices stay high for months, as firms review supply chains and pricing. The inflation effect may be softer if weaker household demand lowers spending on non-energy goods and services. RBC Economics expects only gradual and conditional pass-through to broader prices. Oil and gas investment in 2025 is less than half its 2014 share of GDP. Most remaining spending is aimed at maintaining current production, so new investment is limited and less responsive to oil price swings, leaving the overall GDP effect broadly neutral. Given the recent rise in Western Canadian Select prices to around $75 a barrel, we should revisit the analysis from 2025. That view suggested the Canadian economy’s overall reaction to oil price swings would be muted. This implies that current market volatility may be exaggerated, creating openings for trades based on a more neutral outcome.

Trading Implications For Cad Inflation And Equities

Historically, we would expect the Canadian dollar to rally hard alongside oil. However, with forecasts for 2026 confirming that capital investment in the energy sector remains focused on maintenance rather than growth, the mechanism for a stronger loonie is weaker. This supports strategies that bet against significant CAD strength, such as buying call options on the USD/CAD pair. The pass-through to broader inflation appears to be gradual, just as was predicted last year. The latest Statistics Canada data from February showed headline inflation at a manageable 2.4%, indicating that higher fuel costs have not yet broadly infected other sectors. This reinforces the Bank of Canada’s recent decision to hold rates, suggesting that derivatives pricing in imminent rate hikes are likely mispriced. We should focus on the clear split between benefiting energy producers and squeezed domestic consumers. A pair trade, going long derivatives tied to the energy sector ETF while shorting consumer discretionary stocks, seems like a direct way to play this dynamic. This strategy isolates the divergent impacts of expensive oil within the Canadian economy. The thinking from 2025 that the net impact on GDP would be largely neutral seems to be holding true. This means that a spike in oil may not destabilize the broader S&P/TSX 60 index as much as it would have a decade ago. Consequently, selling volatility on the index through option strategies could prove effective, capitalizing on this reduced economic sensitivity. Create your live VT Markets account and start trading now.

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