Crude oil has climbed sharply above $100 a barrel and natural gas prices have soared to multi-year highs as the intensifying conflict between the US and Iran threatens to disrupt global energy supplies. The escalation has triggered fresh concerns about inflation acceleration and pushed government bond yields to their highest levels in nearly two decades, raising borrowing costs for both governments and households.
The recent wave of military strikes has sent shockwaves through energy markets. According to , Brent crude briefly topped $100 a barrel on 9 September after Iran and the US struck tankers in the biggest wave of shipping attacks since the war began, with the benchmark settling at $101.21 a barrel that day. The dated Brent benchmark, which is used to price roughly two-thirds of global supply, has remained above $100 per barrel since 3 September. Meanwhile, Iran vowed to strike energy infrastructure across the Middle East after further US attacks, pushing oil to a six-week high on 7 September.
The conflict has effectively closed the Strait of Hormuz, a critical chokepoint through which oil and gas from the Gulf normally flow to global markets. This disruption to supply routes, combined with renewed fighting between the US and Iran and Israeli threats against Tehran that intensified on 3 September, has revived investor concerns about potential damage to Middle East energy infrastructure and tanker traffic.
How are energy prices affecting consumers?
Natural gas prices have surged dramatically on wholesale markets, with UK prices rising above 200p a therm for the first time since the end of 2022. According to Trading Economics, EU natural gas stood at 78.64 EUR/MWh on 9 September, up 3.69% on the day. European storage levels remain much lower than normal for this time of year, and the urgent need to replenish reserves before winter has further pushed up prices.
UK consumers are currently shielded from short-term wholesale price spikes by Ofgem's price cap, but this protection is limited. The cap is already scheduled to increase by 3.6% from the start of October, with the next adjustment coming in January. If wholesale prices remain elevated for an extended period, households will face substantially steeper energy bills regardless of the cap.
What is happening to borrowing costs?
Fears of accelerating inflation have pushed government bond yields to their highest levels in years. In the UK, yields on 10-year bonds reached their highest point since 2007, while yields on 20- and 30-year bonds climbed to levels not seen since 1998. A Trading Economics update noted that UK gilt yields had recently fallen back after a selloff, with the 10-year yield dropping to just below 5.2% from a 19-year high of 5.29%.
These rising yields signal higher borrowing costs for the government at a time when public finances are already under pressure. The impact extends beyond government finances: higher bond yields directly affect the interest rates households pay on fixed-rate mortgages and other financial products, making borrowing more expensive for families.
What is driving the conflict escalation?
The recent spike in energy prices follows a dramatic escalation in military action. On 8 September, Iran-backed Houthis attacked Saudi energy facilities, setting oil installations ablaze and lifting Brent to a fresh six-week high. Speaking at a Republican Party convention in Texas on an earlier date, President Trump indicated he did not expect the fighting to end until after the US mid-term elections in November, suggesting the conflict may persist for months.
What happens next?
Investors remain focused on whether the conflict will widen further following the tanker strikes and attacks on Saudi facilities. Oil markets will continue to react sharply to any additional attacks on energy infrastructure or shipping in the region. The next critical test will come if either side escalates military operations or if further damage occurs to production facilities or transport routes, either of which could push prices even higher.
The combination of supply disruptions, low storage levels, and geopolitical uncertainty means energy prices are likely to remain volatile in the coming weeks. Policymakers and households alike are watching closely to see whether the conflict remains contained or spreads, as any widening of hostilities could trigger a sustained period of high energy costs that would significantly impact inflation and economic growth.
