European gas prices have climbed to their highest level in almost four years as the escalating conflict between the US and Iran threatens to disrupt energy supplies and push inflation higher across the region.
Oil prices rose above $100 a barrel for the first time since July, while UK gas contracts jumped 4 per cent to their highest level since 2022, when Russia’s invasion of Ukraine triggered a historic energy crisis.
Gas prices have risen 88 per cent since the start of July, adding to concerns that households and businesses could face another surge in energy costs over the winter. Storage levels across the UK and Europe are also at their lowest in 13 years, increasing the risk that countries will have to rely on expensive imports as temperatures fall.
The escalation comes after US forces struck four tankers in the Gulf of Oman and a fifth near Iran’s Kharg Island, the country’s main oil export hub. Iran subsequently launched missiles at a US base in Jordan, most of which were intercepted, according to Jordanian authorities.
Tehran also claimed to have attacked two US ships and eight tankers in the Strait of Hormuz, the critical shipping route through which a significant share of global oil supplies normally passes.
The latest violence followed attacks on Saudi Arabia by Houthi rebels in Yemen, adding to concerns over the security of energy infrastructure and transport routes across the Gulf.
The rise in wholesale energy prices is already feeding through to UK motorists. Petrol prices have increased by 4.4p a litre and diesel by 4.1p since September 1, according to the AA.
Susannah Streeter, chief investment strategist at Wealth Club, described the combination of geopolitical tensions, energy costs and trade disputes as a “toxic cocktail of inflationary pressures”.
“Far from showing signs of resolution, the conflict in the Middle East appears to be becoming more entrenched, creating chronic supply concerns around crude and gas, while intensifying trade battles threaten to push up the cost of goods just as central banks are trying to get inflation under control.
“Given the sustained impact of higher energy prices, the worry is that firms will have little choice, other than to raise prices, which risks creating another inflationary spiral.
“The prospect of higher rates is showing up in the bond markets, with gilt and Treasury yields shifting up yet again, making borrowing more expensive for governments, increasing the prospect of higher interest payments on the huge debts already piled up.”
Streeter said increased production elsewhere was unlikely to offset the disruption in the Middle East, predicting oil prices could remain “stubbornly around $100 a barrel”.
She added: “UK and European gas prices have also risen again to levels not seen since December 2022. Usually, weaker demand for gas and lower prices during the summer months means stocks can be replenished, but the crisis has kept this process on go slow, and as we head towards the colder winter months, storage levels in the UK and Europe are the lowest for 13 years, keeping nations reliant on imports of expensive supplies.
“It’s set to add to the bill burden of households this winter, with domestic energy prices set to ramp up if a resolution to this conflict remains elusive.”
Richard Hunter, head of markets at Interactive Investor, said the deterioration in the Middle East was adding to existing inflation concerns.
“The outlook in the Middle East has recently worsened once more, with any signs of detente looking elusive. Fresh fighting in the region has seen Iran targeting a US base in Jordan as retaliation for US strikes on some of its oil tankers, while Iranian-backed Houthis struck several cities in Saudi Arabia.
“Such focus comes at a time when consumers could be affected by the lack of supply as the colder seasons approach. This adds another level to the inflationary concerns which have blighted investor thinking over recent weeks.”
For governments and central banks, the latest energy shock risks complicating the effort to bring inflation under control. For households, the immediate concern is that elevated wholesale gas and oil prices translate into higher bills just as winter demand begins to rise.
Leave a Comment