Oil Prices Surge Amid Middle East Tensions

Oil prices have surged past £90 a barrel, driven by concerns over potential disruptions to energy supplies from the Middle East. Brent crude, the global benchmark, saw an increase of 10.5 per cent, reaching £94.37 a barrel by midday in New York. The price has gained 28.3 per cent this week, marking its best weekly performance since early May 2020, and represents over a 40 per cent increase since the beginning of the year.

The escalation in tensions between Iran and both the United States and Israel has raised alarms about sustained inflationary pressures, which could delay anticipated interest rate cuts by the Bank of England and the US Federal Reserve. The yield on the UK benchmark ten-year gilt rose approximately 0.50 percentage points to 4.57 per cent, while the equivalent US Treasury yield climbed by 0.20 percentage points to 4.17 per cent, reflecting these economic concerns.

The recent rally in energy prices was catalysed by US and Israeli strikes on Iran, prompting Tehran to halt tanker movements through the Strait of Hormuz, a crucial artery for about one-fifth of global daily oil supply. With the strait effectively closed for almost a week, approximately 140 million barrels of oil, equivalent to about 1.4 days of global demand, has been stranded from the market. Commercial shipping activity through this strategic waterway has plummeted, with only nine commercial vessels reported to have passed through since the onset of hostilities, compared to a typical daily average of around 50 ships.

Market analysts now predict that crude prices could ascend to £100 a barrel, with Qatar’s energy minister warning they might even reach £150 a barrel if supply constraints persist. Giovanni Staunovo, a commodity analyst at UBS, stated that the longer the Strait of Hormuz remains closed, the higher the prices are likely to rise. David Fyfe, chief economist at Argus, posited that a prolonged closure could result in prices hovering between £100 and £150 a barrel throughout the summer.

Goldman Sachs has indicated that if oil prices rise by £10 and remain elevated for a sustained period, US consumer price inflation could reach 3 per cent by May, up from 2.4 per cent recorded in January. Analysts at Oxford Economics have estimated that the ongoing conflict will contribute an additional 0.4 percentage points to UK inflation for the year 2026. Consequently, the potential for higher oil prices may push petrol prices in the UK to around £1.90 per litre.

Market sentiment has been further affected by these developments, leading to significant losses on equity markets. The FTSE 100 index fell by 129.19 points, or 1.2 per cent, with a weekly loss of 5.7 per cent, marking the largest weekly decline since the “liberation day” US tariff shock in April of the previous year. The S&P 500 also experienced a decline of 2 per cent over the week, while the Nasdaq witnessed a drop of 1.2 per cent.