Energy Market Reaction to Conflict in the Middle East: One Week On

A week after joint US-Israeli strikes on Iran and subsequent retaliatory actions, UK energy markets continue to respond to geopolitical developments, particularly in natural gas and electricity pricing.

Global oil prices have surged over the past week, briefly exceeding $119 per barrel for Brent crude and pushing US West Texas Intermediate to around $104 per barrel. This sharp increase reflects fears of prolonged supply disruptions through the Strait of Hormuz, a critical shipping route for approximately a fifth of the world’s oil and gas deliveries. Shipping through the strait has largely halted, while production in key Gulf nations, including Iran, the UAE, Kuwait, and Qatar, has been disrupted.

Natural gas markets have reacted similarly, with UK month-ahead gas prices spiking by nearly 25% to 171p per therm before settling at around 156p. Prices have now roughly doubled compared with pre-conflict levels, although they remain below the peaks seen in 2022. The suspension of LNG production in Qatar, a major global supplier, has further tightened European supply and added upward pressure on UK gas contracts.

These global developments are transmitted to the UK through wholesale energy costs. While Ofgem’s April to June price cap is fixed, the assessment period for July to September is ongoing, with forecasts indicating a potential increase of around 10%, which could add approximately £160 annually to household energy bills. Availability of fixed tariff deals has decreased, and the cheapest new deals have risen in price.

Fuel prices have also climbed sharply. Petrol and diesel at UK forecourts have reached multi-month highs, while domestic heating oil prices have more than doubled since before the conflict began. Rising global oil costs also contribute to broader inflationary pressures, potentially affecting business energy budgets and household expenses.

The scale and duration of these impacts will depend on how long the conflict continues and the extent of disruptions to production and shipping in the Gulf. Even if crude markets stabilise through measures such as strategic petroleum reserve releases, the interconnected nature of oil, gas, and electricity markets means that UK energy costs are likely to remain elevated until supply uncertainty resolves.