The ongoing conflict in Iran has prompted a dramatic increase in oil prices, surpassing $90 per barrel for the first time since the onset of the Covid-19 pandemic. This surge, which reflects a rise of over 25% since military actions commenced between the United States and Israel against Iran, poses significant risks for global inflation and economic stability.
Rising Prices and Production Cuts
Reports indicate that Kuwait has begun to reduce its oil output due to limitations on storage capacity, which has contributed to the spike in Brent crude prices. On Friday, the cost reached as high as $91.89 per barrel, a marked increase from approximately $72.50 just prior to the outbreak of hostilities. This represents the most substantial weekly increase in oil prices since the early days of the pandemic in April 2020.
Industry analysts are expressing concerns over a potential storage crisis in the Middle East. According to consultancy firm Kpler, oil storage facilities in Saudi Arabia and the United Arab Emirates could be at capacity within three weeks, potentially necessitating further production halts. Such measures are considered a last resort due to the lengthy and costly process of restarting production.
Global Energy Supply Risks
Saad al-Kaabi, Qatar’s energy minister, has warned that if the conflict persists, all Gulf energy exporters may be forced to cease production within weeks, with oil prices potentially soaring to $150 per barrel. He further stated that even if hostilities were to cease immediately, it could take several weeks or even months for Qatar to resume its liquefied natural gas (LNG) exports, following damage inflicted on a critical terminal by an Iranian drone strike. Qatar is responsible for around 20% of the world’s LNG exports.
Although the UK relies on Qatar for a mere 2% of its total gas supplies, recent market fluctuations have caused gas prices in the UK to reach their highest levels in three years. This surge raises concerns regarding Europe’s ability to compete for gas supplies, especially if the situation in the Middle East does not stabilise soon.
Geopolitical Tensions and Market Reactions
The Islamic Revolutionary Guard Corps of Iran has threatened to target Western tankers traversing the Strait of Hormuz, a crucial maritime route for approximately 20% of the globe’s oil and LNG. Since the commencement of military actions on 28 February, at least nine vessels have reportedly been attacked in the Gulf, further exacerbating market uncertainties. Despite the Trump administration’s efforts to mitigate fears by offering insurance and military escorts for vessels in the area, confidence remains low among market participants.
In response to escalating energy prices, UK government bond yields are rising sharply, with five- and ten-year bonds poised for their most significant weekly increase since the upheaval caused by Liz Truss’s “mini-budget” in September 2022. Expectations for a cut in UK interest rates this month have diminished significantly, dropping from 80% to just 15% as market conditions evolve.
Stock Market Volatility
The escalating conflict has also had a pronounced impact on stock markets across the Asia-Pacific region, marking the worst performance since the early stages of the Covid-19 pandemic. The UK’s FTSE 100 index fell by more than 5%, reflecting the most significant decline since April 2025, coinciding with the imposition of sweeping global tariffs by former US President Donald Trump. The pan-European Stoxx 600 index mirrored this trend, also declining over 5% during the week.
Airline stocks have been particularly hard-hit, with IAG, the parent company of British Airways, experiencing a drop of over 12%. Low-cost airline Wizz Air saw a decline of nearly 20% after issuing a profit warning, attributing potential losses of approximately €50 million (£43 million) to the ongoing crisis in the Middle East.
As the US dollar strengthens in the wake of the Iranian attacks, the price of gold has decreased by roughly 3.5% during the week, falling below $5,100 an ounce.
Why it Matters
The recent surge in oil prices driven by geopolitical tensions in the Middle East has profound implications for the global economy. As inflationary pressures mount, the potential for increased costs across various sectors looms large, threatening economic recovery efforts in many regions. The situation necessitates close monitoring as energy markets remain volatile and the geopolitical landscape continues to evolve, underscoring the intricate connections between international relations and economic stability.