Key facts
- Brent crude oil prices reached their highest level in over a month, climbing as much as 4.6% to $87.08 a barrel.
- European natural gas prices also surged, with the August delivery contract hitting its highest level since early April.
- Increased inflation fears linked to rising energy costs have led markets to price in further interest rate hikes by the Bank of England and European Central Bank.
- Donald Trump announced a policy shift regarding the Strait of Hormuz, stating it would remain open and introducing fees for transiting vessels.
- Traffic through the Strait of Hormuz has significantly slowed, impacting supply chains and contributing to upward pressure on oil prices.
Oil and gas prices surged on Tuesday, with Brent crude reaching its highest level in over a month and European natural gas prices also climbing significantly, following a third night of US military strikes against Iran. The escalating tensions and fears of further supply chain disruptions, particularly concerning the Strait of Hormuz, have fueled expectations of higher inflation.
Brent crude, the international benchmark, rose as much as 4.6% to $87.08 a barrel. This followed a 10% jump on Monday after President Donald Trump announced a blockade of Iranian shipping. Natural gas prices also saw substantial increases, with the Dutch August delivery contract, the European benchmark, up nearly 3% to €52.8 a megawatt hour, and the UK equivalent climbing 3.3% to 128.27p a therm.
The surge in energy prices has intensified concerns about inflation, leading financial markets to price in a greater likelihood of interest rate rises by the Bank of England and the European Central Bank. For the first time in a month, traders are anticipating a quarter-point UK rate hike by September, potentially followed by another by year-end. Similarly, the ECB is now expected to implement a quarter-point increase in September and another by December.
President Trump stated that the Strait of Hormuz would remain open and announced that the US would begin charging fees for ships transiting the waterway to cover security costs. This apparent policy shift has raised concerns about further upward pressure on oil prices. Kathleen Brooks, research director at XTB, noted that the blockade of the Strait of Hormuz, through which a fifth of global oil supply passes, has effectively halted traffic, with only six cargo ships traversing it on Sunday, significantly impacting supply chains.
In response to the geopolitical developments and rate hike expectations, UK government bond yields rose, with the 10-year gilt yield reaching 5.02%. Stock markets experienced a downturn, with the FTSE 100 index slipping 0.4% and the Stoxx Europe 600 dropping 0.5%, despite gains in oil companies BP and Shell. Asian stock markets showed a mixed performance, with South Korea's Kospi and Japan's Nikkei 225 rising, while China's Shanghai Composite also saw an increase.