Reeves: 'Nothing off the table' on energy support as Iran crisis raises prices
Discussing support for energy-intensive industries, Chancellor Rachel Reeves stated:
"So there is other work going on in terms of business support, in both my department [the Treasury] and the department for business and trade. Nothing is off the table at this stage. We are looking at targeted support as well as broader measures but it is just too early to say what is needed."
Reeves noted the government is revisiting plans initiated during the previous administration amid the 2022 Russian energy shock for targeted support schemes, which were not finalized then.
"[That] makes it more likely to be able to use targeted support this time. We are looking at all of those things. But it’s too early to give you different scenarios and different options for those scenarios."
Reeves: UK prepared to release strategic oil reserves
The UK is ready to release strategic oil reserves as part of an international effort to mitigate rising crude prices, Reeves told the Treasury committee.
"I’ve been very clear the UK is willing to play its part in using those reserves to put downward pressure on oil prices and make sure supply remains strong."
She cautioned that the Middle East conflict will impact the UK economy.
"It’s certainly not good for the British economy to have trade disrupted, especially when so much oil and gas comes from that part of the world."
However, she said it is premature to assess the full economic effects.
"At this stage I think it would be unwise to speculate on what the impact on inflation and interest rates would be."
Reeves highlighted the UK's reduced reliance on international energy markets compared to the time of Russia's invasion of Ukraine.
"We are now less reliant on international energy price movements than we were when Russia invaded Ukraine. Because we’ve invested more in homegrown, renewable energy, which is not subject to this price volatility because it’s purchased through contracts for difference. Over the next few years, we will even be more insulated as more of that renewable energy comes online, and as we build the infrastructure to better connect it to the grid. And that will be facilitated, of course, by the Planning and Infrastructure Act, which was passed at the end of last year. But even in the last five years, we have become less reliant on those international energy markets. That’s not to downplay the significance in movements in global oil and gas prices. But the context is slightly different than it was when Russia invaded Ukraine."
How Iran has used the Strait of Hormuz to throttle oil and gas – a visual guide
Global oil markets have experienced significant volatility this week after the US-Israeli conflict with Iran disrupted the flow of Middle Eastern crude through the Strait of Hormuz.
This narrow waterway, located south of Iran and north of Oman, is among the world’s most critical trade routes, transporting approximately one-fifth of global oil and seaborne gas from Gulf production facilities and refineries to international markets.
The strait handles just over 20 million barrels of oil daily, ranking it as the busiest oil route after the Strait of Malacca between Malaysia and Indonesia. It is also the primary route for liquefied natural gas (LNG) shipments carried by super-chilled tankers.
Unlike the Malacca corridor, which transports about 23.2 million barrels daily to buyers in China, Japan, and South Korea, the Strait of Hormuz is far more challenging to bypass, making it the largest chokepoint in the global energy system.
The waterway narrows to just 21 miles at its tightest point, serving as the passage for crude and petroleum products from the world’s largest petrostates to reach global markets.
Susannah Streeter, chief investment strategist at the Wealth Club, commented on market movements:
"Erratic energy prices are keeping investors on edge as the war in Iran rages with no clear end in sight. Brent crude is still largely holding onto its dramatic decline, but it’s staying highly volatile. In the past 24 hours it’s dipped as low as $83 a barrel before heading to $94 and retreating back to around $90. There’s fresh concern about chaos in the market given how seriously production is being disrupted. The FTSE 100 has fallen back in early trade as investors remain highly jittery about the knock-on effect for the global economy."
Saudi Aramco CEO Amin Nasser warned of an energy shock, describing it as the biggest crisis faced by oil and gas producers. He cautioned that the longer the conflict continues, the more severe the consequences for the industry and the global economy.
Supply disruptions persist, with the Strait of Hormuz remaining impassable and storage facilities filling rapidly across the region. Iran’s Revolutionary Guard has reiterated threats to destroy ships passing through the strait. President Trump's offer to escort vessels appears unfeasible on a large scale. While the US military has destroyed mine-laying ships, ongoing attacks on US allies have led shipping companies to avoid the channel until the conflict resolves.
Regarding inflation and interest rates, Streeter stated:
"Amid the uncertainty and worry about the war, the repercussions on a vast array of goods and services are being assessed given the warnings that prices are set to increase for fuel, energy, freight, airfares and food. Inflation fears are back front and centre and it looks like policymakers will stay extremely wary when they meet next week to decide on interest rate policy. There’s a raft of central bank meetings taking place, and high caution will be the name of the game."
For the Bank of England, a significant policy shift may occur. A rate cut was anticipated due to the sluggish economy and deteriorating jobs market. However, policymakers now face a stagflation scenario, complicating future decisions. UK borrowing costs have risen, with gilt yields climbing amid expectations of prolonged higher interest rates.
UK and eurozone government bond yields rise as rate expectations shift
Government bond yields in the UK and eurozone have increased amid growing inflationary pressures and changing interest rate forecasts.
The UK’s benchmark 10-year gilt yield rose 9 basis points to 4.64%, while the two-year gilt yield increased 11 basis points to 3.97%, reversing a significant drop from Tuesday.
Germany’s two-year Bund yield climbed 7 basis points to 2.34%, reflecting heightened expectations of a European Central Bank rate hike. Markets now fully price in a rate increase by September, with an 80% chance of a July hike.
The 10-year German yield rose 4 basis points, and the Italian 10-year yield jumped 10 basis points.
Investors view the UK as more vulnerable to an energy price shock than other European nations due to its reliance on gas and weaker public finances. The two-year gilt yield has increased by 46 basis points this month, compared to approximately 35 basis points for French and German bonds and 21 basis points for US debt.
Emma Wall, chief investment strategist at Hargreaves Lansdown, remarked:
"The key to determining longer term impact, not just for equity markets but also bond markets and indeed inflation and economic growth, will be unlocking the Strait of Hormuz, which remains practically impassable."
UK mortgage rates rise above 5%, highest since last summer
UK mortgage rates have climbed to levels unseen since last summer, as expectations for a Bank of England interest rate cut this year have diminished.
Markets now assign only a 6% chance of a rate cut at the Bank’s 19 March meeting, down from 80% before the US and Israeli attacks on Iran, which have driven oil and gas prices higher and threaten to increase inflation. The probability of any rate reduction this year has dropped to 20% from 50% on Tuesday.
This shift is reflected in mortgage rates, with nearly 500 mortgage deals withdrawn recently—the largest reduction since the 2022 mini-budget aftermath, according to Moneyfacts.
The average two-year fixed homeowner mortgage rate is 5.01%, up from 4.84% on Friday, marking the highest level since 6 August last year. The average five-year fixed rate rose to 5.09% from 4.96%, the highest since late June. Overall, the average Moneyfacts mortgage rate opened at 5.04%, up from 4.91% on Friday, the highest since early August.
Adam French, head of consumer finance at Moneyfacts, commented:
"Recent days have been some of the most turbulent in the UK mortgage market since the aftermath of the September 2022 mini-budget. In the last 48 hours, almost 500 residential mortgage products have been withdrawn as lenders reacted to rapidly rising swap rates. However, the scale is nowhere near the shock seen in late September 2022 when 935 products, which accounted for more than a quarter of the market at the time, disappeared in a single day. Many of these deals are likely to return within the next few days and weeks as lenders adjust their pricing to higher rate expectations. It’s unwelcome news for borrowers, as the prospect of falling mortgage rates has quickly given way to rate rises. How far they could go is now heavily dependent on how global markets and inflation expectations evolve as conflict in the Middle East unfolds."
A G7 source told that although no country currently faces a physical oil shortage, prices are rising sharply and maintaining the status quo is not an option. They indicated that countries outside the International Energy Agency (IEA), such as China and India, might also be approached.
However, any release of reserves requires further discussion regarding total volume, country allocations, and timing. The source added:
"The IEA secretariat is expected to propose scenarios, based on expected market impact, and outreach may extend to non-IEA members like China and India."
Oil prices rise to $90 a barrel despite G7 statement
Oil prices have climbed back to $90 per barrel amid skepticism about whether the IEA’s planned record release of oil reserves can offset supply disruptions caused by the Iran conflict.
Brent crude fluctuated during the morning, dipping earlier but rising 2.5% to $90.05 per barrel.
This rise occurred despite a statement from G7 energy ministers following a Tuesday meeting with the IEA, affirming their intent to address oil supply issues and market volatility, including the use of strategic reserves.
G7 energy ministers support strategic oil reserve use in principle
The G7 nations announced their support in principle for proactive measures to address oil supply challenges and market volatility, including deploying strategic oil reserves.
Energy ministers held a virtual meeting with the IEA on Tuesday to discuss the Iran war’s impact on energy markets and supply.
In a statement emailed to Bloomberg, G7 energy ministers said:
"Working alongside the IEA, we are vigilantly monitoring energy market trends and are coordinating within the G7 and with our international partners, IEA member countries, and beyond."
They also expressed appreciation for the IEA governing board meeting:
"We warmly welcome today’s meeting of the IEA governing board, which provides a crucial opportunity for member countries to assess the current security of supply and market conditions."
They concluded:
"In principle, we support the implementation of proactive measures to address the situation, including the use of strategic reserves. G7 members will carefully consider the recommendations."
Introduction: Oil prices retreat, Asian shares rise after IEA oil reserve release report
Good morning, and welcome to our ongoing coverage of business, financial markets, and the global economy.
Oil prices have retreated and Asian shares advanced following a Wall Street Journal report that the IEA plans the largest release of oil reserves in its history to reduce crude prices.
This proposed release would surpass the 182 million barrels distributed by IEA members in two tranches during 2022 after Russia’s invasion of Ukraine. The IEA convened an extraordinary meeting on Tuesday, with a decision anticipated today.
Brent crude fell 0.27% to $87.56 per barrel in early trading.
Kerstin Hottner, head of commodities at Vontobel Asset Management, told :
"Several major questions loom over the oil market’s trajectory. Chief among them is the timing of safe passage for vessels through the Strait of Hormuz, a critical chokepoint for global oil supply. Another concern is the possibility of infrastructure damage... Even if major hostilities subside, the prospect of ongoing low-level Iranian drone attacks on energy infrastructure could prolong market instability into next year."
In Asian markets, Japan’s Nikkei and South Korea’s Kospi both rose 1.4%, Shenzhen gained 0.78%, and Hong Kong’s Hang Seng declined 0.16%.
Gas prices increased slightly, with UK natural gas up 1.8% to 122.82 pence per therm, and European gas rising 2.8% to 48.72 euros per megawatt hour.
Gold edged higher as investors sought safe-haven assets, with spot gold rising 0.1% to $1,924 an ounce.
Nikos Kavalis, Singapore managing director of Metals Focus, told :
"I think it’s very likely that we’ll see gold get to over $2,000 an ounce by the third or fourth quarter this year."
Iran has effectively closed the Strait of Hormuz, through which one-fifth of global oil and seaborne gas shipments transit. Hundreds of tankers remain stranded near the strait amid reports that Iran has begun laying explosive devices in this strategically vital waterway.
Markets await US inflation data expected to show the headline rate steady at 2.4% last month.
9:45am GMT: Treasury Committee to question Rachel Reeves on spring forecast
12:30pm GMT: US inflation data for February (previous: 2.4%, forecast: 2.4%)
