Initial Market Reactions to Gulf Tensions
Up until late on Thursday, the increase in global oil prices seemed more like an unfortunate disruption than an impending oil crisis. The immediate market reaction to the closure of the Strait of Hormuz—a critical shipping lane—was a 10% price increase, which appeared relatively mild considering this scenario has long been viewed as a nightmare for oil markets.
However, by Friday, perceptions began to shift as new developments emerged.
Escalation Following Gulf Energy Export Warnings
Qatari Energy Minister Saad al-Kaabi's statement that all Gulf energy exporters were likely to halt exports within days, and his warning that oil prices could reach $150 a barrel, triggered a significant market response. Since the conflict began, crude oil prices have surged by 27%.
Prices for derivative petrochemical products—essential for daily life and industrial supply chains and reliant on unobstructed Gulf passage—such as jet fuel and urea, have also experienced sharp increases.
While the situation has not yet escalated into a full energy shock, markets are beginning to anticipate more severe outcomes, though not necessarily the worst case. It may not take much for oil prices to exceed the $100 per barrel mark in the coming week.
Strait of Hormuz Status and Market Implications
Iran has not officially closed the Strait of Hormuz. However, the strait has been effectively closed due to soaring insurance costs and safety concerns among sailors.
The overall effect is a surge of inflationary pressures originating from the conflict zone, disrupting global markets for energy, fuel, food, industrial chemicals, and credit.
Forecast Discrepancies and Market Volatility
On Monday night, I cautiously suggested that forecasts from the Office for Budget Responsibility (OBR), the UK government's independent forecasting body, might already be outdated before their scheduled publication on Tuesday.
The extent of this discrepancy has been surprising, four days after the Spring Statement and a week into the conflict.
On Tuesday, the OBR assumed the price of a barrel of crude oil would be $63. By Friday, it closed at $94.
The assumed cost of a therm of gas delivered to the UK was 74 pence, but it reached £1.35 and peaked at £1.70 during the week.
The gilt rate, representing the effective interest rate on 10-year UK government borrowing, was assumed to be 4.4%, but ended the week at 4.6%, nearly hitting 4.7%, marking a significant change.
UK government bonds have been more adversely affected than those of other countries, as traders recall the UK's vulnerability to energy price inflation during the Russia-Ukraine crisis.
The prevailing expectation is that the Bank of England (BoE) will delay interest rate cuts as inflation remains persistent.
This shift occurred just as markets began to acknowledge the government's rapid planned reduction in borrowing.
Impact on Mortgage Market and Monetary Policy
There is an immediate impact on the mortgage market. Banks are repricing home mortgages after a brief period of optimism that interest rates might decline.
Consequently, a mortgage price war is unlikely while these uncertainties persist. The BoE, previously expected to cut rates this month, is now anticipated to adopt a wait-and-see approach.
Potential Duration and Broader Conflict Implications
While these tensions may subside, US President Donald Trump has indicated the conflict could last weeks or months. Some economic warnings from the Gulf region may be intended to influence his perspective.
The situation extends beyond the stoppage of energy flow through the Gulf's critical artery.
From Bahrain's oil facilities to Qatar's gas processing plants, the port near Dubai Palm, and tankers near Kuwait, a series of attacks have raised questions about a deliberate Iranian strategy to increase the economic costs of US-Israeli military actions.
The economic consequences are not merely incidental but are an integral component of the conflict.
Uncertain Economic Outcomes and Global Inflationary Effects
This complexity makes precise predictions challenging, but this emerging wave of inflation from the Gulf is expected to impact global markets, including the UK.
