Oil prices surged and stock markets slumped yesterday as Iran vowed to retaliate for an attack on its huge Pars gas field.
Brent crude leapt to around $110 a barrel and the FTSE 100 slumped by nearly 100 points as traders reacted to the fresh escalation in the conflict.
The surge in oil prices since the US and Israel launched their war on Iran has already sent motorists’ fuel bills surging and with gas prices shooting higher too, inflation is expected to climb.
That has dashed hopes that the Bank of England might cut interest rates today and has even prompted traders to bet that they will be hiked later this year.
The attack on the Iranian installation – part of the world’s largest natural gas field, shared with Qatar – was reportedly carried out by Israel with US consent. It is the first reported strike on Iranian energy infrastructure since the war began at the end of last month.
Iran’s Fars news agency reported that gas tanks and parts of a refinery had been hit, workers had been evacuated to a safe location and emergency crews were trying to put out a fire.
The Iranian facility is part of the world’s largest gas field
Qatar, a US ally, called it a ‘dangerous and irresponsible’ escalation that put global energy security at risk. One Iranian official said the attack meant that ‘the pendulum of war has swung’ to a ‘full-scale economic war’.
Iran warned Saudi Arabia, the United Arab Emirates and Qatar to evacuate several energy installations which it said ‘have become direct and legitimate targets and will be targeted in the coming hours’.
It will only add to fears over an energy supply crunch which is already being described as the biggest ever – surpassing the 1970s oil crisis.
At the heart of today’s crisis is the closure of the Strait of Hormuz, through which a fifth of the world’s oil and gas passes – choking off up to 10 million barrels of oil a day.
That has already sent oil prices surging from $72 before the war to as much as nearly $120 and prompted Iran to tell the world to get ready for $200 a barrel oil.
In recent days it has hovered around $100 and earlier yesterday, supply hopes were boosted after Iraq restarted oil exports via pipeline.
The death of top Iranian official Ali Larijani and US attacks on Iranian positions near the Strait of Hormuz had also lifted hopes of the war drawing nearer to close.
But the fresh escalation saw the FTSE 100 lurching more than 1 per cent, or over 100 points, lower before clawing back some of the losses. US stocks also headed down.
Danni Hewson, head of financial analysis at investment platform AJ Bell, said: ‘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.’
Meanwhile, latest figures from the RAC show the average price of a litre of petrol has climbed by 10p to nearly 143p since the start of the war. For diesel it is up by 20p to nearly 163p.
Government borrowing costs also rose yesterday as investors dumped UK bonds, known as gilts.
Bonds across the world have been affected by the Middle East turmoil but Britain’s are seen as especially vulnerable because Britain already has the highest inflation among the G7 group of advanced economies.
Traders are also jittery about the possibility of a government bail-out for household energy customers along similar lines to the subsidies given to bill payers when prices spiked at the start of the Ukraine war at the cost of tens of billions of pounds.
Thomas Pugh, chief economist at accountancy firm RSM UK, said that together with the country’s ‘weaker economic backdrop’ it meant that Britain ‘is more vulnerable to shocks than many comparable countries’.
