Crude oil prices have surged past the $90 per barrel mark for the first time since April 2024, following escalating tensions between the US and Israel and Iran. This dramatic rise, exceeding 25% since the onset of hostilities, poses significant threats to global inflation and economic stability.
Oil Price Spike Driven by Production Cuts
Reports emerging from Kuwait indicate a reduction in oil output due to storage limitations, further exacerbating the price increase. On Friday, the international benchmark for oil, Brent crude, reached a peak of $91.89 per barrel. Just a week ago, prices hovered around $72.50 before the conflict escalated, marking the most substantial weekly gain since the early days of the COVID-19 pandemic in April 2020.
This surge is not just a reaction to immediate geopolitical tensions; it raises fears of an impending storage crisis in the Middle East. Analysts from Kpler caution that facilities in Saudi Arabia and the UAE could reach capacity within 20 days, potentially leading to production halts. Such a scenario, while seen as a last resort, could trigger a lengthy and costly restart process, adding further strain on the oil markets.
Predictions of Further Price Increases
Saad al-Kaabi, Qatar’s energy minister, has voiced concerns that if hostilities in the region persist, all Gulf oil producers might be forced to cease operations, potentially driving prices to an astonishing $150 per barrel. He added that even a swift resolution to the conflict wouldn’t guarantee a quick return to normalcy for liquefied natural gas (LNG) exports from Qatar, which plays a crucial role in the global energy supply.
The UK is less reliant on Qatari gas, sourcing only about 2% of its total supply from the nation. However, recent market fluctuations have pushed UK gas prices to their highest levels in three years. This spike raises apprehensions about Europe needing to outbid Asian competitors for LNG shipments, further straining the market.
Geopolitical Risks and Market Reactions
The risk of confrontation in the Gulf has escalated, with Iran’s Islamic Revolutionary Guard Corps threatening to target Western vessels in the Strait of Hormuz, a critical passageway for approximately 20% of global oil and LNG. Since the US and Israeli attacks began on February 28, at least nine ships have reportedly faced assaults, heightening fears of destabilisation in a region pivotal to energy supply chains.
Despite efforts by the US administration to alleviate market tensions—such as offering insurance and military escorts for tankers—confidence remains shaky. Approximately 600 vessels, including 195 oil tankers and 15 LNG carriers, are currently navigating the Gulf, according to figures from Lloyd’s List.
In response to the escalating crisis, stock markets in Asia-Pacific nations, which heavily depend on Gulf energy imports, have experienced their steepest declines since the pandemic began. In the UK, the FTSE 100 index fell by over 5%, marking its worst week since April 2025. Airlines have also been hit hard, with IAG, the parent company of British Airways, suffering a loss exceeding 12% and Wizz Air experiencing a decline of around 20% after issuing profit warnings linked to the ongoing conflict.
Inflation Fears Ripple Through Financial Markets
The spike in energy prices has triggered inflationary fears, impacting UK government bonds. The yields on five- and ten-year bonds are poised for their most significant weekly increase since the “mini-budget” crisis under former Prime Minister Liz Truss in September 2022. Expectations for an interest rate cut in the UK have diminished significantly, with current assessments dropping from an 80% likelihood to merely 15% this week.
Similarly, Eurozone bond prices are experiencing declines, with yields reflecting a likely interest rate increase from the European Central Bank by year-end now being almost fully anticipated.
Why it Matters
The ongoing conflict in Iran and the resulting surge in oil prices underscore a precarious moment for global markets. Rising costs of energy are not just a burden for consumers but can ripple through economies, exacerbating inflation and affecting everything from fuel prices to the cost of living. As geopolitical tensions continue, the economic implications could be profound, leading to tighter monetary policies and potentially stalling recovery efforts in various sectors worldwide.
