Oil and Gas Prices Rise Amid US-Iran Clashes
Oil and gas prices have surged, and expectations for interest rate increases in Europe have grown following recent US-Iran tensions.
Brent crude, the international benchmark for oil prices, climbed by as much as 4.6% to $87.08 a barrel on Tuesday, marking its highest level in just over a month.
The price had surged up to 10% on Monday after former President Donald Trump announced a blockade of Iranian shipping, with US strikes pushing prices even higher on Tuesday.
Gas prices also increased significantly. The Dutch natural gas contract for August delivery, which serves as the European benchmark, rose nearly 3% to €52.8 per megawatt hour, its highest since early April.
The UK natural gas contract for August delivery increased by 3.3% to 128.27p per therm, reaching its highest level in more than three months.
Inflation Fears Drive Interest Rate Expectations
Concerns about rising inflation linked to the increase in oil prices have fueled expectations of interest rate hikes by the Bank of England and the European Central Bank (ECB).
For the first time in a month, financial markets priced in a quarter-point UK rate rise by September, likely followed by another increase by the end of the year. Traders also anticipate the ECB will raise rates by a quarter point in September, with a further increase by the end of December.
At the start of the month, swap contracts priced in less than a quarter-point rise for both the Bank of England and the ECB, during a period when a fragile ceasefire was in place between the US and Iran.
Policy Changes and Market Reactions
The market volatility followed Trump's statement that the Strait of Hormuz would remain open, but the US would begin charging fees on ships transiting the waterway. A 20% fee would be imposed "for any and all costs necessary" to ensure security and safety for vessels.
"The prospect of more fighting and a fresh blockade has meant that traffic through the strait has slowed to a near halt," said Kathleen Brooks, research director at the broker XTB. "Only six cargo ships traversed the strait on Sunday, which is a trickle compared with previous flows in recent weeks. When the supply chain gets gummed up, this is what keeps upward pressure on the oil price."
This apparent policy reversal has heightened fears of further upward pressure on oil prices, potentially contributing to higher inflation. Brent crude was trading at $72.48 a barrel before the US-Israeli strikes on Tehran in late February and reached highs of $120 in April.
Impact on UK Bonds and Stock Markets
UK government bond yields rose to their highest levels since May, with the 10-year gilt yield increasing five basis points to 5.02%. The yield on the two-year gilt, which is particularly sensitive to interest rate expectations, jumped eight basis points to 4.45%, the highest since 19 May.
Stock markets declined on Tuesday. The UK’s blue-chip FTSE 100 index slipped 0.4%, despite gains in two of its largest constituents, oil companies BP and Shell, which rose 2.4% and 1.7% respectively.
The Stoxx Europe 600, which tracks the largest companies across the continent, dropped 0.5%.
Mixed Performance in Asian Markets
In Asia, stock markets showed mixed results due to a rebound in technology shares. South Korea’s Kospi and Japan’s Nikkei 225 rose by 0.7%, while the Chinese Shanghai Composite increased by 1.4%.
