The global economy is being rocked by the most severe oil price shock in six years, as escalating military conflict in the Middle East triggers a cascade of financial turmoil and stokes fears of a prolonged inflationary crisis.
Brent crude, the international oil benchmark, soared by as much as 10% on Friday alone to hit $94 a barrel—a level not seen for three years. The staggering surge means prices have rocketed by more than 25% this week, the biggest weekly gain since the height of the Covid-19 pandemic in early 2020. The immediate catalyst is a “near-total temporary pause” in traffic through the Strait of Hormuz, a critical maritime chokepoint for global energy supplies, due to security threats and operational uncertainty.
Production Halts and Soaring Forecasts
The energy crisis intensified with reports that Kuwait has joined Qatar in halting energy production. Qatar’s state-owned natural gas company halted LNG production following alleged attacks on its facilities. This follows Iraq’s earlier cut to crude production by 1.5 million barrels per day due to storage and export issues. Analysts now suggest the United Arab Emirates could be next to reduce supply.
Major financial institutions have responded with stark warnings. Analysts from firms including Goldman Sachs and Barclays have revised their oil price forecasts sharply upwards, with some suggesting a barrel of oil could reach $100 or even $120 if the conflict between the US, Israel, and Iran persists. “There is not much to stop (oil) from hitting 100 dollars per barrel in the near term,” said Kathleen Brooks, research director at XTB.
Markets in Retreat
Global stock markets, faced with this violent recalibration of energy costs and geopolitical risk, have taken a severe hammering. London’s FTSE 100 Index slumped 1.2% on Friday, while Wall Street’s S&P 500 and Dow Jones indexes fell around 1.1%. The sell-off was mirrored across Europe, with Germany’s Dax and France’s Cac 40 both closing 0.9% and 0.7% lower respectively after steeper intraday falls. Gloomy US jobs data added to the market woes.
“Until the oil price stabilises it’s hard to see how stock markets and bond prices can recover,” Ms Brooks cautioned, warning of further declines if hostilities escalate over the weekend.
Inflation Fears Hit UK Borrowing Costs
The shockwaves have violently repriced expectations for UK interest rates and public borrowing. The yield on 10-year UK government bonds, or gilts, jumped from 4.27% to 4.62% this week alone. Traders are aggressively pricing out anticipated interest rate cuts by the Bank of England, with some even speculating about a potential rate hike, as soaring fuel costs threaten to reignite inflation.
Economists estimate the oil spike could add 0.4 percentage points to UK inflation this year, exacerbating a lingering cost-of-living crisis. “The rapid repricing of monetary policy expectations and the UK’s history of high energy prices means that UK gilts are particularly vulnerable to this energy price spike,” Ms Brooks noted.
A Stance of “Unconditional Surrender”
Hopes for a swift de-escalation appear to have been dashed by the stance of US President Donald Trump. He has stated there will be “no deal with Iran except UNCONDITIONAL SURRENDER!” and indicated a desire to be involved in selecting Iran’s next leader, calling the son of the late Ayatollah Ali Khamenei “unacceptable.” President Trump has also stated he is not concerned if petrol prices rise.
The conflict, dubbed “Operation Epic Fury,” represents a direct and costly escalation from previous proxy hostilities. Estimates suggest the first 100 hours of the US-Israeli military campaign cost approximately $3.7 billion, a significant portion of which was unbudgeted. The geopolitical landscape is further complicated by reports that Russia is providing intelligence on US positions to Iran.
The situation draws alarming parallels with previous oil shocks, such as the aftermath of Russia’s invasion of Ukraine in 2022. With a critical portion of the world’s energy supply now under threat, economists are warning that a prolonged conflict could severely dampen global growth and tip economies towards recession, leaving financial markets braced for a volatile and painful period ahead.
