The escalating conflict between the US and Iran has sent oil prices soaring, with Brent crude jumping 8.5% to around $79 a barrel on Monday. This follows a significant rise from just above $60 in January, as tensions have intensified. Natural gas prices also spiked, with European benchmark prices up 38% after QatarEnergy halted production at two sites due to drone attacks.
The rising energy costs are expected to feed through rapidly to consumers, particularly in net energy importers like the UK. This could drive up inflation and potentially force the Bank of England to reconsider interest rate cuts. The odds of a rate cut at the Bank's next meeting on 19 March fell to 69% from 80% last week, amid the risk of a new tick upwards in prices.
The key concern is the disruption to traffic through the Strait of Hormuz, which carries about 20% of global oil supplies. Tankers are already declining to use the route, and some ships are avoiding the Suez Canal as conflict engulfs the wider region. This could push up shipping costs for other goods besides crude.
Economists at Goldman Sachs warn that a complete blockage of the Strait of Hormuz for a month could push oil prices up by as much as $15 a barrel. However, this could be partly mitigated by ramping up supplies via other routes. The Opec+ producers' cartel has already signalled a modest increase in quotas.
The duration of the shock is crucial. If prices retrace over the next few months, the impact on inflation in developed markets is likely to be modest and short-lived. However, if oil prices shoot up to $90-100 a barrel and stay there, inflation could be up to 0.8% higher than expected, forcing central banks to raise interest rates and squeezing consumers, putting the brakes on economic growth.
