Oil surges and stock markets fall after strikes in Iran – what does it mean for petrol prices and your money?
The Office for Budget Responsibility (OBR) has warned that the situation in Iran could have a “significant impact” on economies around the world with the impact of the ongoing conflict set to hit people’s finances.
The warnings comes after the US and Israel launched strikes on Iran, sparking widespread conflict across the Middle East, with a major gas plant shut in Qatar and the US appearing set to move navy ships into the key shipping route, the Strait of Hormuz.
The latest escalation comes after a year in which US president Donald Trump instigated tariffs on nations around the world during the prolonged tension between Iran and Israel. Along with the invasion by Russia on Ukraine – which hugely affected commodity prices – these large-scale cases of conflict are having a real impact on people’s pockets across the globe.
In the face of the most recent developments, with Iran launching strikes on US and UK ships in the Strait of Hormuz, the price of oil has risen to almost $84, an increase of close to a fifth (18.5 per cent) this week.
That could have significant knock-on effects in terms of inflation, interest rates and commodity prices if the attacks are prolonged. Stock markets have been reacting to the uncertainty with the FTSE 100 falling sharply this week and indices in Asia down overnight three days running.
Here, The Independent takes a look at how the latest conflict could affect you.
Oil and gold
Despite settling a little after Monday’s initial spike of almost 10 per cent, the price of Brent oil has once more been on the march. It is up by 3 per cent on Wednesday, sitting at $83.90 at the time of writing.
Opec has raised the amount of oil it is producing from next month to counteract the effects of the current situation, giving rise to hope it will be a short-term spike rather than a price shock – but that’s only if the matter is resolved quickly.
Around a fifth of the world’s oil and gas flows through the Strait of Hormuz, so if Iran keeps it closed over a prolonged period, that will have a greater impact on rising prices.
Richard Hunter, head of markets at Interactive Investor, said the attacks “unsurprisingly had a debilitating effect on many asset types”, with concern over “escalation and duration of the conflict” key to how high prices might fluctuate.
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“At the eye of the storm was the potentially inflationary spike of the oil price at a time when central banks are still hoping that any further price rises could be contained. The oil price jumped by almost 9 per cent Monday, despite the announcement that Opec would be increasing production, although attacks on ships in the Strait of Hormuz have kept tensions high,” he added.
Gold, meanwhile, is another commodity which spiked on Monday – though has pulled back slightly since. It remains a little under $5,200 after an 18 per cent climb this year so far. The precious metal is often the safe haven investors look to when uncertainty reigns in other financial markets.
Petrol, inflation and interest rates
Those numbers above are what is happening now; the knock-on effects on fuel and the economy are what come next.
First, higher oil costs naturally mean fuel will become more expensive, which is partly why Opec released additional supply to prevent the cost surging too high. However, experts have suggested that a prolonged closure of the Strait of Hormuz could quickly see oil rise to between $90-100.
Right now, though, it’s still considerably lower – though even this rise will soon feed through to petrol stations.
On a longer-term perspective, Oxford Economics’ chief global economist Ryan Sweet released a note suggesting a prolonged closure of the Strait would see oil prices stay higher for the first half of the year. “We estimate this could push up the average oil price to almost $80 per barrel in Q2 before gradually falling back to a little more than $60 towards year-end. Gas prices would rise sharply too,” he said.
Elsewhere, it’s important to note higher energy costs – not just at petrol pumps but also heating bills, production costs, everything regarding transport and more – have an inflationary impact. While UK inflation has been gradually coming down and was predicted to reach 2 per cent by spring, these events may derail that ambition. In the EU, inflation was already below 2 per cent.
Additionally, in the UK, the potential for inflationary price action means we will be far less likely to see an interest rates cut later this month as had been expected as recently as last week, with the Bank of England perhaps likely to assume a cautious stance and prolong their decision to cut until April.
Stock markets, investments and pensions
The FTSE 100 fell on Monday by 1.2 per cent and on Tuesday by 2.7 per cent, as investors reacted negatively to the unfolding events. US markets also fell on Tuesday, though futures markets show the S&P 500 likely to open only about 0.2 per cent down on Wednesday and the Nasdaq slightly further in the red, around 0.4 per cent down.
In London, however, the FTSE 100 opened up by 0.1 per cent on Wednesday, perhaps a sign investors believe the additional risk is now priced in across the index – though soon fell back slightly to be flat after an hour of trading.
Each of Germany’s DAX, France’s CAC 40 and the Euro Stoxx 50 were also in the green by between 0.5 and 0.8 per cent immediately after trading started, having suffered losses across the previous two days.
Overnight in Asia, almost all the major nations saw their primary index drop for a third day – Australia, Japan, China, Hong Kong, South Korea, India and Vietnam are all in the red, some of which have already finished their trading day at the time of writing. Korea’s KOSPI index has fallen more than 16 per cent this week alone.
Looking more specifically at who has been impacted, airlines were naturally hit hard on Monday. IAG, which owns British Airways, fell more than 5 per cent – one the biggest fallers in the FTSE 100. Banks, hotel-owning firms and events companies were also down – while, perhaps unsurprisingly, the likes of weapons manufacturer BAE Systems was one of the few risers on the day.
It all means that people with even diverse investments might be seeing dips at the start of this week, be they in stocks and shares ISAs, workplace pensions or SIPPs.
Generally speaking, while levels of pensions may rise and fall in accordance with market events, if you are not close to retirement age, it’s not usually something experts say you should be unduly concerned about to the extent of panic-trading, which can harm longer-term gains.
