When I was young, my dad took me fishing at the lake and taught me something that I didn’t fully understand until decades later. The lure, he said, isn’t built to feed the fish. It’s built to irritate it. A good spinner doesn’t look like a meal — it looks like something small and flashy darting where it has no business being. The fish doesn’t strike because it’s hungry. It strikes because it’s provoked. “You’re not fishing the water,” he told me. “You’re fishing the temper.” I thought about that line all week, because this week the water was the Strait of Hormuz, the lure was three damaged oil tankers, and the fish with the temper was at the NATO meeting in Turkey.

Here’s what happened. On the 6th and 7th, projectiles struck three commercial vessels in the strait — cheap, deniable, asymmetric jabs of the kind Iran has spent years perfecting. Tehran has little conventional naval or air power to speak of; its grip on that waterway rests on drones, mines, and fast boats. Three damaged ships cost Iran almost nothing. What they bought was the reaction. Over the course of several hours, the U.S. struck multiple targets, the President declared the June memorandum “over,” and even floated seizing Kharg Island — Iran’s main oil export terminal. A handful of projectiles pulled a superpower back toward a war it had spent three weeks trying to leave. That, in a sentence, is the whole story. The title of this note plays on the strait’s name, but the bait isn’t really about geography. It’s about who took it.

Why would Iran provoke a response it cannot possibly win on the battlefield? The answer is that it isn’t trying to win on the battlefield. Strategists have a name for what Iran is running: the “escalation trap,” or the trap of asymmetric resolve. A smaller power uses its cheapest assets to drain a larger one’s most expensive capabilities — and more to the point, its patience and its political capital. The strait is the ideal instrument, because unlike the nuclear file it can be pulled at almost no cost, and it works every single time it’s tried.

And every turn of that cycle pays Tehran three ways. It lifts the price of oil, which Iran still sells — even at the height of the war it kept roughly two million barrels a day flowing, and its Revolutionary Guard reportedly charges a quiet toll on the ships it waves through. It lets Iran cast Washington as the party that tore up the deal. And it widens the gap between the U.S. and allies who want no part of another Gulf war — most nations flatly declined the request to send warships, and Britain’s outgoing PM, Keir Starmer, used the NATO stage to remind everyone of the economic bill.

Now here’s the part that matters for your portfolio — and it’s the reason I’m not losing sleep over the day-to-day headlines. If you read the tanker attacks as bait, the market’s shrug stops being a mystery. Iran does not want to close Hormuz. That strait is its own economic artery; full closure would strangle Tehran along with everyone else, which is exactly why, in four decades of threats, it was never actually carried out until this year. Iran wants the cycle, not the shutdown. So look at the tape. Brent jumped about 5% to just over $78 on the 8th — its best day since the spring — and handed much of it back within a day, slipping back under $77 as traders reassessed. Set that against March, when the strait genuinely seized up, traffic collapsed by more than 95%, and Brent ran toward $120 in what the IEA called the largest supply disruption in the history of the oil market. A 5% pop that fades inside a session is not a market pricing a closure. It’s a market pricing a bluff.

As you can see in the above chart, the Brent crude futures curve today is sloping downward, which means that the prices for contracts in the future are lower than they are today. The market is literally pricing crude lower in the months ahead, even with the shooting under way. At the start of the year, you can see that the curve was upward sloping – the market expected prices to be higher in the future. But, even with oil prices down sharply from their April peak, they have not returned to where they were at the start of the year. And the contract prices for next year and all the way out to 2031 are also higher than what the market had built in before this mess started. In other words, the futures curve might be downward sloping but it’s sloping down from a higher shelf.

Let me be plain, though, because I never want to talk anyone into complacency. There is a scenario that turns this from a throttle into a real crisis — and it isn’t Iran closing anything. It’s the U.S. taking the Kharg Island bait: striking export infrastructure instead of harassing shipping. That would pull genuine barrels off the market, and here’s the uncomfortable part — the shock absorber is nearly empty. The U.S. Strategic Petroleum Reserve just hit its lowest level since 1983. Even if crude prices don’t spike and fade but simply stay elevated for months, you still get two hits. The first is the obvious one, at the pump and the freight dock: a straight tax on real incomes that leaves less for everything else. Note also that if the profit margins on refining diesel widen relative to refining gasoline, guess what gets refined more and what gets refined less. Yes, increased production of diesel helps to potentially relieve the cost pressure on transportation of goods. But, if this leads to lower gasoline refinery output, then prices at the pump may not come down like Trump wants. They could go in the other direction.

Normally, the summer demand for gasoline results in a higher profit margin for refining gasoline than diesel, but the script has flipped. The diesel-over-gasoline crack is now running near $23 a barrel—its widest for any July in a decade, as you can see in the chart above. This has been exacerbated by Russia halting diesel exports and becoming an importer after Ukrainian strikes on its refineries. Outages have also rippled through refining capacity from the U.S. East Coast to China. Why should you care? Because even though diesel is the fuel of the real economy and an increase in diesel production sounds good, if this keeps gasoline prices higher, it acts as a tax on households. Higher spending on gasoline could in turn lead to lower spending on discretionary items.

The second effect from sustained hostilities in the region is quieter and more corrosive — the wealth effect running in reverse. Let a sustained energy shock knock equities down, and households watching their retirement balances shrink don’t wait for anyone to ring a bell on a recession; they close their wallets on their own. U.S. consumer spending accounts for roughly two-thirds of the economy, and confidence is a mood, not a spreadsheet. Stack a lighter paycheque against a lighter portfolio and you have the precise mechanism that turns a Gulf skirmish into a North American slowdown — weaker spending, softer earnings, and a market forced to reprice growth rather than just oil. That is the tail risk I am wary of. While this isn’t my base case, it is a long way from zero.

The third hook in the water is aimed at the rate-watchers. The reflex runs: oil up, inflation up, Fed hikes, sell everything. But an oil-driven price bump is a supply shock, and the new Fed chair, Kevin Warsh, has said plainly that supply-shock inflation is precisely the kind a central bank looks through. With the funds rate sitting at 3.50–3.75% and the next meeting at month-end, a fading oil spike arguably takes pressure off the hawks rather than piling it on. Investors should be careful not to take that bait either.

Let’s also spare a thought for the view from our side of the border, because it flips the entire story. The same headline that is a straight headwind for American drivers, on balance, is a net positive for Canada. We are a net oil exporter: some $140 billion in crude last year, at record production. Higher oil supports our energy names, our royalties and the loonie. You could see it in the split screen this week, as the energy subgroup of the TSX firmed even as the broad TSX dipped on risk-off. This week, StatCan also reported that Canada had a trade surplus of $4.24 billion in May, which was the third consecutive surplus and the highest since February of last year. The wider surplus was driven by a 1.5% increase in exports to the US, largely in metals and energy byproducts as a result of the Iran war. If we get a prolonged war relapse, then this would presumably help the export story. Bottom line, for all the talk of Canadian recession, the reality is that the economy is growing.

So, what am I watching into next week? Three things. Whether U.S. strikes stay on ships or move to oil infrastructure — that’s the only escalation that reprices crude for real. The shape of the oil curve, which is quietly calling this whole episode transitory. And the calendar: the Bank of Canada on the 15th, the Fed at month-end. Everything else is flash and spinner. The oldest lesson in fishing turns out to be the oldest lesson in markets, too: the lure is designed to make you act against your own interest. The fish that thrives isn’t the one that never sees the bait. It’s the one that sees it clearly — and doesn’t strike.

On behalf of the Pyle Wealth Advisory team, have a wonderful weekend.     

Andrew Pyle