Oil prices surged around seven per cent after President Donald Trump pledged to strike back at Iran, as escalating tensions in the Middle East and threats to key shipping routes push global energy costs higher ahead of interest rate decisions from both the US Federal Reserve and the Bank of England.
Oil prices have jumped by around seven per cent as tensions between the US and Iran continue to escalate, following a pledge from President Donald Trump to “hit Iran hard” after an attack on an American military base in Jordan. Iran’s threats to shipping through the Bab el-Mandeb Strait pushed WTI crude above $84 (£63.19) a barrel, with Brent crude closing near $90 (£67.71). The spike comes just hours before the US Federal Reserve’s Federal Open Market Committee is due to announce any changes to interest rates, with rising energy costs expected to add further pressure on inflation.
Escalating threats to key shipping routes
Iranian-backed Houthi forces have openly floated imposing fees on commercial vessels passing through the Bab el-Mandeb Strait, one of the world’s most strategically important shipping routes, connecting the Red Sea with the Gulf of Aden. Around 10 to 12 per cent of global seaborne trade passes through the waterway. Alongside the Strait of Hormuz, which handles around 20 per cent of the world’s oil reserves and has been effectively closed off by Iran in recent months, the two routes together carry a significant share of the world’s oil and liquefied natural gas exports, meaning disruption to either can quickly drive up global energy prices.
In response to the escalating threat, US and Saudi-backed forces have carried out strikes against Houthi militias in Yemen as the conflict continues to spread across the region.
Impact on consumers and businesses
Higher oil prices are expected to push up the cost of petrol, diesel, heating fuel and air travel, adding further pressure to inflation in many countries should the conflict continue. Energy analysts have also warned that if shipping companies are forced to reroute vessels around the Cape of Good Hope to avoid the affected waterways, journey times between Europe and Asia could increase by 10 to 14 days, raising transport costs across global supply chains. Shipping insurers have already raised war-risk premiums for vessels operating in parts of the Red Sea and surrounding waters, adding further costs to global trade.
The airline sector has already begun to feel the effects, with American Airlines becoming the latest carrier to trim its profit forecasts for the year, as higher fuel prices outweigh continued strong demand from travellers.
Market reaction
Investors have moved money into traditional safe-haven assets such as gold and the US dollar, reflecting growing concern that the conflict could widen further across the Middle East. Defence companies and major oil producers have generally outperformed broader stock markets, as investors anticipate increased military spending alongside stronger profits for energy firms during the crisis.
Analysts say the greatest risk to global markets would come not from a short-term spike in crude prices, but from a prolonged disruption to oil exports, which would have a far greater impact on inflation and economic growth if sustained over time.
Central banks under pressure
The market turmoil comes as central banks prepare to make key interest rate decisions. The Federal Reserve is expected to announce its latest decision later today, while the Bank of England is due to confirm its own stance on borrowing costs tomorrow. The Bank’s Monetary Policy Committee has held the UK’s base rate at 3.75 per cent in recent months. Since the Covid-19 pandemic, central banks around the world have generally raised interest rates in an effort to keep inflation under control, though analysts warn that a prolonged period of high borrowing costs could slow the pace of post-pandemic economic recovery.
Expert reaction
Danni Hewson, head of financial analysis at AJ Bell, said: “With nerves about the potential inflationary impact of the escalating conflict in the Middle East colliding with worries about soaring tech capex, it’s been tough to find the optimism, even if London markets enjoyed a continued boost from big oil and defence stocks as investors adjust to the changing political and geopolitical landscapes. It’s worth remembering that at the start of the month the price was hovering around $70 a barrel and markets had dared to hope that central bankers might be able to seamlessly shift from a pause to further cuts. Though the ECB held firm there’s little doubt that unless tensions de-escalate quickly, September’s rate story will be one of hikes. And the fluctuations over the past months are having a significant impact on the airline sector, with American Airlines the latest to trim profit forecasts for the year as higher prices more than offset resilient demand from travellers.”
