Energy prices have surged amid growing concerns that the conflict in the Middle East will not be quickly resolved. Crude oil prices climbed above $100 a barrel this week, reaching $105 on Thursday, as tensions escalate between the United States and Iran.
The conflict has led to the effective closure of the Strait of Hormuz, a critical chokepoint for oil and gas shipments from the Gulf, disrupting supplies to global markets. The price of natural gas has also seen significant increases on wholesale markets, with UK prices exceeding 200 pence per therm for the first time since late 2022. This rise is partly attributed to lower-than-normal storage levels in Europe and the urgent need to replenish reserves before winter.
These rising energy costs have fueled fears of an acceleration in inflation. This inflationary pressure has, in turn, contributed to a rise in yields on government bonds globally. In the UK, yields on 10-year bonds have reached their highest level since 2007, while 20- and 30-year bond yields are at their highest since 1998. This indicates an increased cost of borrowing for the government, particularly at a time when public finances are already strained. Furthermore, these higher yields can impact consumers through increased rates on financial products like fixed-rate mortgages.
While UK consumers are currently protected from immediate wholesale gas price spikes by Ofgem's price cap, prolonged high prices could still lead to higher household bills. The cap is scheduled to increase by 3.6% in October, with another adjustment expected in January.
President Trump commented on the situation at a Republican Party convention in Texas, suggesting that the fighting might not conclude until after the U.S. midterm elections in November.