The price of wholesale oil and gas remains high after a bruising start to the week prompted by the crisis in the Middle East which stoked fears about the longer-term hit to the global economy.
The widespread conflict, which began after the US and Israel launched strikes on Iran over the weekend, hit commodity prices and stock markets, prompting concerns that the impact will trickle down to working people, who may see price hikes to their fuel, heating energy and – if left unchecked for too long – some foods and day-to-day products.
The latest escalation comes after a tumultuous year for global economies, including US president Donald Trump instigating tariffs on nations around the world during the prolonged tension between Iran and Israel, as well as Russia’s invasion on Ukraine, which hugely affected commodity prices.
In the face of the most recent developments, the price of oil has risen to more than $85 on Friday, an increase of close to a fifth (18 per cent) this week, which could have implications for inflation, interest rates and commodity prices if the attacks are prolonged.
Stock markets have been reacting to the uncertainty with the FTSE 100 falling this week and indices in Asia suffering several days of losses.
Analysts have also warned that, in the UK, household energy bills could rise by 10 per cent from July following the sharp increases in wholesale gas prices.
Here, The Independent takes a look at how the latest conflict could affect you.
Oil and gold
Despite settling a little after Monday’s initial spike of almost 10 per cent, the price of Brent oil has continued to rise. It is up by more than 18 per cent across the week, sitting at $85.60 at the time of writing. For context, Brent has been priced between $60-70 for much of the past year; in 2022 it surged well past the $110 mark.
Brent crude is a global benchmark for oil pricing. Even though that specific oil type may not be “stuck” in the Strait of Hormuz, its price is affected by supply and demand elsewhere. When it changes, it affects many other oil prices.
Opec, the organisation of oil-exporting nations which controls production levels, has raised the amount of oil it is producing from next month in a bid to counteract the effects of the current situation.
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Around a fifth of the world’s oil and gas flows through the Strait of Hormuz, so if Iran keeps it closed over a prolonged period, that will have a greater impact on rising prices. As the cost of fuel goes up, production, transport and energy will become more expensive – potentially meaning bills and goods prices are hiked and therefore raising inflation.
Susannah Streeter, chief investment strategist at Wealth Club, said President Trump’s decision to escort tankers through the Strait of Hormuz – hoping to avoid attacks in the process – had not alleviated concerns in the market.
“Oil prices have headed sharply higher again, trading around $84 a barrel, the highest level since late January,” she said.
“President Trump’s promise to escort tankers and backstop insurance does not appear to have eased concerns. However, industry data indicating that crude stocks in the US rose by 3.5 million last week, more than expected, is limiting gains to some extent.”
She added that the heat had “turned up” on gas prices again, with Qatar’s natural gas plant remaining closed after being hit this week, further impacting supply lines. That means a more immediate effect in UK energy terms, with suppliers appearing to pre-empt rising fees by removing certain tariffs from the market.
“The surge in gas prices is already being felt by energy customers in the UK, with big providers pulling some of the cheaper fixed-price deals. Household budgets could take a further hit, given that hopes for interest rate cuts are fading. Higher energy prices look set to push up the headline rate of inflation, keeping central bankers wary about voting for further interest rate cuts,” Ms Streeter added.
Gold, meanwhile, is another commodity which spiked on Monday – though has pulled back since. It remains around $5,120 after an 18 per cent climb this year so far. The precious metal is often the safe haven investors look to when uncertainty reigns in other financial markets.
Petrol, inflation and interest rates
Those numbers above are what is happening now; the knock-on effects on fuel and the economy are what come next.
First, higher oil costs naturally mean fuel will become more expensive, which is partly why Opec released additional supply to prevent the cost surging too high. However, experts have suggested that a prolonged closure of the Strait of Hormuz could quickly see oil rise to between $90-100.
Right now, though, it’s still lower – though even this rise will soon feed through to petrol stations if it is prolonged.
On a longer-term perspective, Oxford Economics’ chief global economist Ryan Sweet suggested a sustained closure of the Strait would see oil prices stay higher for the first half of the year.
“We estimate this could push up the average oil price to almost $80 per barrel in Q2 before gradually falling back to a little more than $60 towards year-end. Gas prices would rise sharply too,” he said.
Elsewhere, it’s important to note higher energy costs – not just at petrol pumps but also heating bills, production costs, everything regarding transport and more – have an inflationary impact. While UK inflation has been gradually coming down and was predicted to reach 2 per cent by spring, these events may derail that ambition. In the EU, inflation was already below 2 per cent.
Additionally, in the UK, the potential for inflationary price action means we will be far less likely to see an interest rates cut later this month as had been expected as recently as last week, with the Bank of England perhaps likely to assume a cautious stance and prolong their decision to cut until April.
Stock markets, investments and pensions
The FTSE 100 has fallen by more than 4 per cent this week, as investors reacted negatively to the unfolding events. But, in a possible shift in sentiment, it is up 0.3 per cent on Friday morning, early in the trading day.
US markets also fell earlier in the week and, despite rising on Wednesday, the S&P 500 is still down 1.1 per cent for the week. Futures markets show it opening flat later on Friday, with the tech-heavy Nasdaq index the same.
Each of Germany’s DAX, France’s CAC 40 and the Euro Stoxx 50 are also in the red for the week, by around 5 per cent, but each are up on Friday morning by around 0.6-0.8 per cent.
Overnight in Asia, almost all the major nations saw their primary index finally rise on Thursday after three consecutive days falling – Saudi, Australia, Japan, China, Hong Kong, South Korea, India and Vietnam are all in the green – but it’s a mixed picture on Friday with India and Vietnam down, Hong Kong and Japan leading the charge upwards.
It all means that people with even diverse investments might be seeing dips at the start of this week, be they in stocks and shares ISAs, workplace pensions or SIPPs.
Generally speaking, while levels of pensions may rise and fall in accordance with market events, if you are not close to retirement age, it’s not usually something experts say you should be unduly concerned about to the extent of panic-trading, which can harm longer-term gains.
