Gas and oil prices soar and shares tumble on fears conflict could escalate
Osmond Chiaand
Natalie Sherman,Business reporters
Gas prices have spiked and global stock markets tumbled as the conflict in the Middle East intensified and concerns grew over how long it will last.
The UK gas price surged by more than 46%, following sharp gains on Monday pushing it to its highest level for three years. Brent crude oil briefly rose above $85 a barrel.
In the US, the Dow Jones Industrial Index plunged by more than 2% in morning trade. The S&P 500 and the Nasdaq saw similar declines, following sharp falls in Europe.
Since Israel and the US launched strikes on Iran and Tehran retaliated, investors have been weighing the potential economic impact, including what it could mean for inflation and interest rates.
There are fears the fight in a region that plays a key role in global energy supplies and shipping routes could have a similar impact to Russia’s full-scale invasion of Ukraine four years ago which pushed up the cost of energy, causing price rises for businesses and consumers around the world.
In its latest fiscal outlook document, the UK’s Office for Budget Responsibility said the escalation of the conflict could upset its forecasts, warning it could have “very significant impacts on the global and UK economies”.
Market reaction, especially in the US, had been relatively muted on Monday – a bet that the conflict would prove short-lived.
But investors are now “reassessing the situation”, as shipping traffic in the region comes to a standstill and the White House’s timeline for the war remains uncertain, said Philip Palumbo, founder of Palumbo Wealth Management.
“As long as this war continues – which, it can continue longer than people think – it can be an issue for the price of oil… which can be impactful to an overall economy,” he told the BBC. “That’s why you’re seeing the markets de-risk at this moment.”
A prolonged rise in energy costs could scramble bets on the direction of interest rates, and weigh on the artificial intelligence (AI) industry, which has huge energy demands and had helped drive stock market gains, Thierry Wizman of Macquarie Group warned in a note.
“That the current war may be ‘inflationary’ is what’s panicking traders today,” he said.
UK gas prices rose above 165p a therm on Tuesday, which it last traded at a year after the start of the Ukraine war. It fell back to 146p a therm by early afternoon.
The boost to the gas price came after QatarEnergy, one of the world’s biggest exporters, halted production following “military attacks” on its facilities.
It subsequently announced that it would stop producing other materials including aluminium, methanol and urea used for fertiliser.
UK gas prices have now doubled since the US and Israel began a wave of air strikes on Iran on Saturday.
Higher gas prices could put pressure on household energy bills, although any impact would not be seen in the UK until July because a price cap has been put in place until then.
Oil prices have not risen as sharply as there is greater flexibility in sourcing additional crude compared to gas. Brent crude is 17% higher than Friday’s close.
Nevertheless, rising oil prices can affect the economy by making things such as motor fuel, transport and food more expensive.
If inflation – the pace of price rises – picks up, then this may make central banks less likely to cut interest rates in the months ahead.
In the UK, the FTSE 100 was 2.9% lower. Germany’s Dax fell 4% while in France, the CAC-40 slid by 3.5%.
Shipping through the Strait of Hormuz is crucial to the global economy, with about 20% of the world’s oil and gas passing through the waterway. But traffic has come to a halt after several vessels were attacked in recent days.
Ebrahim Jabbari, an adviser to the commander-in-chief of Iran’s Islamic Revolutionary Guard Corps (IRGC), told state TV that ships “should not come to this region. They will certainly face a serious response from us”.
As well as pushing up prices on global energy markets, the conflict has triggered a rise in how much it costs to transport oil.
Hiring a supertanker to move oil from the Middle East to China reached an all-time high on Monday of more than $400,000 (£298,300) per day, almost double the cost last week, according to data from the London Stock Exchange Group.
Sanne Manders, president of logistics technology platform Flexport, told the BBC the Strait of Hormuz was “effectively closed”.
It is partly down to carriers not willing to take the risk, but also due to “insurance companies not being willing to insure this risk anymore”, he told the Today programme.
He added that carriers were likely to start raising rates “for any shipping in the world” in anticipation of higher fuel prices.
He is scheduled to meet Treasury Secretary Scott Bessent and Energy Secretary Chris Wright on Tuesday to discuss the issue.
Crude oil prices could pass $100 a barrel if the disruption to shipments is prolonged, Srinivaasan Balakrishnan from risk research firm Avellon Intelligence said.
He predicted that if it held at that level US petrol prices could rise by up to 25 cents a gallon.
Secretary of State Marco Rubio said Washington would announce plans on Tuesday to deal with rising energy prices
“We knew that going in would be a factor,” Rubio said. “You will see us rolling out those phases to try to mitigate against that.”
The UK is also likely to see higher fuel prices if the cost of oil remains high, according to Alasdair Locke, chairman of Motor Fuel Group, the UK’s largest independent forecourt operator.
“With the price of oil going up, that is inevitably going to feed through in due course to higher prices at the pump,” he said.
“It will depend on how long and how high those prices go as to how high the price of fuel will be.”
In Asia, Japan’s Nikkei closed 3.3% lower, with shares in export‑reliant firms like Toyota, Panasonic and Sony among the hardest hit.
Hong Kong’s Hang Seng and the Shanghai Composite in mainland China were also down. The Kospi in South Korea, which was shut for a public holiday on Monday, fell by more than 7%.