Oil, Gas, and Borrowing Costs Surge Amid Middle East Tensions

Escalating fears regarding the Middle East conflict are driving sharp increases in energy prices and borrowing costs globally. Crude oil prices exceeded $105 a barrel on Thursday, having broken the $100 mark earlier in the week, as the war between the US and Iran in the Gulf intensifies.

The hostilities have effectively closed the Strait of Hormuz, a critical chokepoint that prevents oil and gas supplies from the Gulf region from reaching international markets. Consequently, natural gas prices on wholesale markets have also soared. In the UK, gas costs rose above 200p per therm for the first time since late 2022, aided by low storage levels across Europe and urgent demand to refill reserves before winter.

While Ofgem’s price cap currently shields UK consumers from immediate wholesale spikes, sustained high prices will eventually lead to steeper household bills. The cap is scheduled to rise by 3.6% at the start of October, with the next adjustment set for January.

Concerns that these energy hikes will accelerate inflation have pushed UK government bond yields to their highest levels in decades. Yields on 10-year bonds reached their peak since 2007, while 20- and 30-year bond yields hit levels not seen since 1998. These rises imply higher borrowing costs for the government during a period of fiscal pressure and may also impact consumers through higher rates on products such as fixed-rate mortgages.

Speaking at a Republican Party convention in Texas on Wednesday, President Trump stated that he does not expect the fighting to conclude until after the US midterm elections in November. He further claimed, without providing evidence, that Iran aims to influence the election outcomes and suggested that oil prices would not decline until after the November races.