Key Highlights
- Gas and oil prices soar as the conflict in the Middle East intensifies.
- UK’s Office for Budget Responsibility warns of significant economic impacts.
- Shipping through Strait of Hormuz comes to a halt, pushing up transport costs.
- Global stock markets plunge as investors weigh potential long-term effects.
The Sky’s the Limit for Gas Prices
Gas prices have surged to their highest level in three years. The UK’s gas price, which rose above 165p a therm on Tuesday, last traded at this level after the start of the Ukraine war.
Since Saturday, when Israel and the US launched strikes on Iran, UK households are bracing for higher energy bills by July. A price cap is in place until then, but any impact from the current spike will be felt once that expires.
Air Strikes and Oil Market Anxiety
Brent crude oil benchmark briefly rose above $85 a barrel for the first time since July 2024. This comes as QatarEnergy, one of the world’s biggest exporters, halted production following “military attacks” on its facilities.
While there is greater flexibility in sourcing additional crude compared to gas, rising oil prices can make motor fuel, transport, and food more expensive. Central banks may also be less likely to cut interest rates if inflation picks up due to higher energy costs.
The Strait of Hormuz: A Lifeline Threatened
Shipping through the Strait of Hormuz is crucial for global oil and gas supplies, with about 20% passing through this waterway. Recent attacks have halted traffic, and insurance companies are no longer willing to insure this risk.
Ebrahim Jabbari from Iran’s Islamic Revolutionary Guard Corps stated that ships should not come to the region; they will face a serious response. Higher shipping costs are already at an all-time high for supertankers moving oil from the Middle East to China, reaching over $400,000 per day.
Global Markets in Free Fall
The FTSE 100 index fell by 2.75% on Tuesday, while Germany and France’s main indexes closed down by 3.44% and 3.46%, respectively. In the US, the S&P 500 dropped sharply but recovered some losses to end 0.9% lower.
Asia’s Nikkei fell 3.3%, with Hong Kong’s Hang Seng and Shanghai Composite also down. South Korea’s Kospi, closed by more than 7% following a public holiday on Monday.
The UK’s Office for Budget Responsibility warned that the conflict could upset its economic forecasts.
Chancellor Friedrich Merz from Germany expressed concerns about potential economic damage, echoing fears that this conflict could have a similar impact to Russia’s full-scale invasion of Ukraine four years ago.
You might think this is new, but it’s been seen before. The last time global markets faced such volatility was during the Ukraine conflict. This time, however, Iran plays a critical role in energy supplies and shipping routes.
