Global oil prices rose sharply after Iran’s response to a regime change bid by the US and Israel disrupted shipping, raising expectations of a new energy-led surge in inflation.
Early trading in Asia, followed by first major financial market activity Air strikes on Iran on Saturday morningInternational benchmark Brent crude rose 13% to $82 a barrel – its highest level since July 2024.
After that initial spike, however, prices eased.
Oil was trading at $77.56, about $5 higher than on Friday, with Brent up 8% since February when a 1% rise was explained by fears that US-Iran peace talks are off track.
Effects of rising oil prices extended
As for the UK, a rise in oil costs threatens a significant rise at the fuel pumps later this month but also a wider rise in costs across the economy at a time when inflation is forecast to ease sharply, largely on the back of lower energy prices – natural gas.
Iran Latest: Tehran Retaliates for Assassination of Supreme Leader
A 10% increase in global oil costs added an average of 0.4 percentage points to domestic inflation, according to 2017 research by Washington-based UN financial institution, the International Monetary Fund (IMF).
Last week, most financial market participants expected the Bank of England to cut interest rates at its next rate-setting meeting in just two weeks. That level of confidence is now at risk given the wealth of uncertainty that is pressing on the price outlook because of the war.
However, market critics pointed out that Monday’s rise in oil prices was limited by the fact that some members of the OPEC+ group of oil-producing nations controlled by Saudi Arabia responded to the conflict by pledging to increase output from next month.
20% of global oil and gas exports to pass through Strait of Hormuz by 2024
It’s not just oil…
Iran’s response to Saturday’s strikes targeted Gulf states and the nearest ship was scrambling for cover. At least three tankers were damaged by missile and drone strikes, regional news agency reports said.
The regime has yet to aggressively follow through on pre-war threats to close the Strait of Hormuz, through which about a fifth of the world’s oil and natural gas supplies flow, but its attacks on shipping have effectively created a pause.
The channel holds more than 20 million barrels of oil a day, according to recent annual figures, and tankers are vulnerable because the strait is only 21 miles wide at its narrowest point — about eight miles, when the islands are taken into account.
Maritime shipping in the Gulf, which borders the United Arab Emirates and Iranian coasts, has been shown to dash for anchor on multiple occasions, but new sailings are subject to wartime insurance levels, according to industry experts.
The disruption threatens to increase shipping costs, at least in the short term, and some Europe-bound ships have been diverted from the firing line and around Africa instead of transiting through the Suez Canal.
A longer route may add up to a fortnight to transit time.
No price data was available on Sunday night but marine insurance industry news provider Lloyd’s List said about 170 containerships in the region had reported delays.
Broad financial market movements
Futures data from brokerage IG indicated the FTSE 100 was set to open up 0.9% after Friday’s record close of 10,910. That prediction, made late Sunday, is expected to change ahead of the open market in Europe.
Energy stocks should benefit from higher wholesale prices. Precious metal miners could also get a boost from a rush to safe havens, for example, building on Friday’s rise – a surge in sympathy with oil.
Read more:
Why is the Strait of Hormuz so important?
What ship tracking information tells us about Gulf disruption
Dubai hotels were hit during Iran’s missile attack
Kathleen Brooks, director of research at XTB, said of the stocks at risk: “Airlines and hotel groups could sell off sharply early this week as flights are grounded and airspace is closed in the Middle East.
“Holiday bookings may also start to cancel over the lucrative Easter period, following reports that Iran has launched drones at UK military bases in Cyprus,” he wrote.
In Asia, the dollar strengthened in early trade and took more than half a percent from the pound, standing above $1.34 – sterling’s lowest level since late January.
There was also support for the safe-haven Japanese yen and the Swiss franc.
Gold, another source of safety in troubled times, rose about 2% to settle at $5,348 an ounce, down from $5,360 levels.
