Energy markets remain highly volatile as investors struggle to gauge how long the conflict involving Iran could last.
Brent crude is trading close to $90 a barrel, after sharp swings driven by fears of supply disruption and hopes the war could be short-lived. The turbulence has prompted warnings from Saudi Aramco, the world’s largest oil producer, which cautioned that the conflict could have “catastrophic consequences” for global energy markets.
The shockwaves are also being felt in financial markets. UK borrowing costs have climbed as traders increasingly believe interest rates may remain higher for longer due to the inflationary impact of rising energy prices.
Yields on 10-year UK government bonds, known as UK gilts, have risen back above 4.55%, reflecting growing concern that higher oil and gas prices could push inflation higher in the months ahead.
The moves highlight how the Middle East conflict is spilling beyond geopolitics into energy markets, inflation expectations and government borrowing costs worldwide.
Susannah Streeter, Chief Investment Strategist, Wealth Club said: ”Erratic energy prices are keeping investors on edge as the war in Iran rages with no clear end in sight.
“Brent crude is still largely holding onto its dramatic decline, but it’s staying highly volatile. In the past 24 hours it’s dipped as low as $83 a barrel before heading to $94 and retreating back to around $90.
“There’s fresh concern about chaos in the market given how seriously production is being disrupted. The FTSE 100 has fallen back in early trade as investors remain highly jittery about the knock-on effect for the global economy.
Saudi Aramco has sounded the latest warning bell about an energy shock, with CEO Amin Nasser saying on an earnings call that it was the biggest crisis oil and gas producers have faced.
“He said there would be catastrophic consequences for the industry, and the consequences for the world economy would be more drastic the longer the conflict continues. Supplies are seizing up, with the key Strait of Hormuz remaining impassable, and storage facilities quickly filling up across the region.
“Iran’s Revolutionary Guard has again vowed to destroy ships using the passage and President Trump’s pledge to escort ships for now seems unworkable on a mass scale. The US military has destroyed a fleet of mine-laying ships, but as attacks on US allies continue, shipping companies look likely to give the channel a wide berth until there’s a resolution to the conflict.
“Amid the uncertainty and worry about the war, the repercussions on a vast array of goods and services are being assessed given the warnings that prices are set to increase for fuel, energy, freight, airfares and food.
“Inflation fears are back front and centre and it looks like policymakers will stay extremely wary when they meet next week to decide on interest rate policy. There’s a raft of central bank meetings taking place, and high caution will be the name of the game. For the Bank of England, there’s likely to be a real change of heart among policymakers.
“A rate cut was largely expected given the sluggish economy and worsening jobs picture. Now they are grappling with a stagflation scenario, making decisions about the path ahead highly tricky. UK borrowing costs have been heading higher, with gilt yields climbing, amid expectations that interest rates will be here to stay higher for longer.’
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