Oil, gas and borrowing costs surge as fears over Middle East escalate

Oil prices have surged to $105 a barrel, driven by concerns over the Middle East conflict's prolonged duration. This has raised fears of accelerating inflation. The US-Iran standoff in the Gulf has intensified, causing crude and gas costs to skyrocket. Brent crude surpassed $100 a barrel on Wednesday and has since climbed higher. The conflict has effectively blocked the Strait of Hormuz, disrupting oil and gas supplies from the Gulf to global markets.

The UK's bond yields have hit their highest level in decades, reflecting heightened inflation concerns. This surge in borrowing costs comes as public finances face strain. Meanwhile, natural gas prices in the UK have soared above 200p a therm for the first time since late 2022. Lower-than-normal storage levels in Europe have contributed to price increases as preparations for winter loom.

President Trump, speaking at a Republican convention in Texas, said he believes the fighting will not end until after the US mid-term elections in November. The price of natural gas in the UK has hit a 14-month high, but UK consumers are shielded from immediate price spikes by Ofgem's price cap. This cap will rise by 3.6% at the start of October, with the next adjustment expected in January.

However, prolonged high prices could still lead to steeper household bills. The rising energy costs have fueled inflation worries, pushing up yields on government bonds worldwide. In the UK, 10-year bond yields reached their highest since 2007, while 20- and 30-year bond yields hit levels unseen since 1998. This indicates a higher cost of borrowing for the government, especially when public finances are under pressure.

Such high yields could also affect households directly, influencing rates for financial products like fixed-rate mortgages.