Oil prices surged after Israel launched attacks on Iran’s nuclear and military sites, raising fears about about disrupted oil supplies.
Fears the attack could spiral into a wider, full-scale conflict also sent shares around the world falling and the price of safe-haven assets such as gold soaring.
The price of Brent crude oil jumped $5.10 (£3.77), more than 7 per cent, to $74.46 (£55.03) a barrel in early trading. West Texas Intermediate, the US benchmark oil price, climbed 6.1 per cent to $72.22 (£53.39).
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The price rises were the biggest price jumps since 2022 when Russia’s invasion of Ukraine caused a spike in energy prices.
London’s FTSE 100 Index dropped 0.6 per cent, down 56 points to 8828.6, in early trading following heavy losses on Asian stock markets as investors feared the consequences of an escalation.
Economists warned the attack on Iran could result in serious harm for business with one expert warning that it was a “bad shock for the global economy at a bad time.”
Here are some of the key ways the economy could be impacted globally.
Iran supplies around 4 per cent of the world’s oil production, with much of it being supplied to China. Israel’s attack reportedly avoided Iran’s oil-producing infrastructure, but that could change if Tehran hits back, causing prices to rise further for longer.
Mohamed El-Erian, president of Queens’ College, Cambridge, and advisor to insurance group Allianz, said higher oil prices could result in what he called a “classic stagflationary shock”, cutting economic growth and fuelling inflation.
“For the average consumer, they will be looking at more income uncertainty. They will be looking at higher petrol prices, and in the UK, they’re probably looking now at higher risk of taxation in October,” he told BBC radio.
Under a worst-case scenario, analysts at investment bank JPMorgan said that closing the Hormuz Strait or a retaliatory response could lead to prices surging to the $120-130 (£88.70-£96.09) a barrel range, nearly double their current base case forecast.
UK heating bills might rise this autumn as traders flagged concerns it could also impact the flow of liquified natural gas (LNG)from the region if tensions escalate.
Kathleen Brooks, research director at XTB, said: “If the oil price continues to climb towards $100 (£73.92) in the coming days, then we could see the interest rate futures market price outrate cuts from the US and Europe, which may add to pressure on shares.
“However, if there is no nuclear escalation, then we think we could see oil prices settle back around $70 (£51.74) per barrel.”
Stock markets – some shares up but others hit
Major oil groups including BP and Shell were among the biggest risers on the steep gains in the cost of crude, with shares up 2 per cent for both firms.
Defence and aerospace group BAE Systems benefitted from the attack seeing its shares move up 3 per cent as the threat of a full-scale war in the Middle East put defence industries back in the spotlight.
Major airline shares suffered a double blow of rising oil prices leading to higher fuel costs for the sector and following the devastating air crash in India. Airlines with routes into the Middle East have suspended flights or said they were flying new routes to avoid it.
British Airways owner International Consolidated Airlines fell more than 4 per cent.
The threat to shipping in the region, a key thoroughfare of world trade, is also making people nervous. “A threat of war in the Middle East is material to freight rates,” Anoop Singh, head of shipping research at Oil Brokerages, said. “For now, this is a risk premium — owners will hold back from putting ships into the Gulf on a business-as-usual basis.”
Many shipping firms have already issued warnings to their ships in the region to exercise greater caution. Container ships added many days to their journeys, from the Far East severely impacting key manufacturing supply chains, by re-routing via the Cape of Good Hope rather than risk missile attacks from Iran-backed Houti rebels in Yemen.
Derren Nathan, head of equity research at Hargreaves Lansdown, said: “It’s not just the outlook for Iranian oil exports that’s a concern but also the potential for disruption to shipping in the Persian Gulf’s Strait of Hormuz, a key route for about 20 per cent of global oil flows and an even higher proportion of liquified natural gas haulage.”
He added: “The escalation of military action adds another factor to consider for central bankers in an already complex world as they weigh up the inflationary impact of ever-changing tariff rates and a weakening outlook for jobs and growth.”
Interest rates could take longer to fall
The Bank of England has been cutting rates, but if oil-stoked inflation moves further from the 2 per cent target, it has less leeway to bring down borrowing costs.
The Bank almost certainly won’t cut rates next week anyway, but an increase in oil prices could mean mortgaged households are left waiting even longer for a cut to their housing costs.
At the same time, if the impact hits the global economy more, the Bank of England could have to drop rates after all, to protect against a recession, meaning the situation is very uncertain.
Matthew Ryan, head of market strategy at global financial services firm Ebury, said: “The spike in oil prices also has broader implications, as it could both weigh on the global growth outlook and keep inflationary pressures higher for longer, which complicates the easing cycle among the world’s major central banks.”
Gold likely to see more investors
Gold prices also leapt towards another fresh record as investors raced for safe-haven assets, which could see it breach the $3,431-an-ounce high (£2,536) set earlier this month.
Gold is used as a safe investment during times of political and economic uncertainty.
“We now expect a gold price of $3,400 (£2,513) per troy ounce by the end of this year and $3,600 (£2,660) by the end of next year,” Commerzbank said in a note.
“For now, the attacks add to the bullish mood in the gold market … with the situation being highly in flux, it is too early to tell whether this shock will lastingly lift prices,” said Carsten Menke, an analyst at Julius Baer.
“Should there be disruptions to oil supplies – either directly due to attacks or indirectly due to politically imposed measures – or should the conflict spread in the region, then gold could show a more lasting reaction.”
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