Oil prices surge as stocks fall and Iran threatens revenge for gas field attack

Rising Tensions and Economic Fallout

Oil prices experienced a sharp increase, while stock markets faced significant declines as Iran announced its intention to retaliate for an attack on its major Pars gas field. Brent crude reached approximately $110 per barrel, and the FTSE 100 fell by nearly 100 points in response to the escalating conflict.

The ongoing war between the US and Israel against Iran has led to a surge in oil prices, which has already caused a rise in fuel costs for motorists. With gas prices also increasing, inflation is expected to rise further. This development has dampened hopes that the Bank of England might lower interest rates today, and it has even prompted traders to speculate that rates could be increased later this year.

The attack on the Iranian installation, which is part of the world’s largest natural gas field shared with Qatar, was reportedly carried out by Israel with US approval. This marks the first reported strike on Iranian energy infrastructure since the war began at the end of last month.

According to Fars news agency, gas tanks and parts of a refinery were damaged, and workers were evacuated to a safe location while emergency crews worked to extinguish a fire.

Qatar, a US ally, described the incident as a ‘dangerous and irresponsible’ escalation that threatens global energy security. An Iranian official stated that the attack signifies that ‘the pendulum of war has swung’ into a ‘full-scale economic war’. Iran has warned Saudi Arabia, the United Arab Emirates, and Qatar to evacuate several energy installations, stating that these sites have become direct and legitimate targets and will be targeted in the coming hours.

This situation has heightened fears of an energy supply crisis, which is being compared to the biggest ever, surpassing the 1970s oil crisis. The closure of the Strait of Hormuz, through which a fifth of the world’s oil and gas passes, has significantly impacted the global market, choking off up to 10 million barrels of oil a day.

The oil price has surged from $72 before the war to nearly $120, prompting Iran to warn the world to prepare for $200 a barrel. Recently, the price has hovered around $100, and there were some hopes of increased supply after Iraq restarted oil exports via pipeline. However, the recent escalation has led to a more than 1% drop in the FTSE 100, or over 100 points, before some recovery.

Danni Hewson, head of financial analysis at AJ Bell, commented: ‘Iranian threats of retaliation against regional energy infrastructure after Israeli strikes on its massive South Pars gas field have helped dial up the temperature once again. Any solution to the blockage of the Strait of Hormuz looks pretty distant at this point and unless and until there is progress on that front, energy markets will likely remain volatile.’

Impact on Fuel Prices and Government Borrowing

Latest figures from the RAC show that the average price of a litre of petrol has risen by 10p to nearly 143p since the start of the war. For diesel, the price has gone up by 20p to nearly 163p.

Government borrowing costs also increased yesterday as investors sold UK bonds, known as gilts. Bonds worldwide have been affected by the Middle East turmoil, but Britain’s are seen as especially vulnerable due to the country having the highest inflation among G7 advanced economies.

Traders are also concerned about the possibility of a government bailout for household energy customers, similar to the subsidies provided during the Ukraine war, which cost tens of billions of pounds. Thomas Pugh, chief economist at RSM UK, noted that combined with the country’s ‘weaker economic backdrop’, this makes Britain more vulnerable to shocks than many comparable countries.