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

Oil prices surged past $105 per barrel after a conflict in the Middle East showed no immediate sign of resolution, spurring worries that inflation could speed up. US-Iran tensions spiked, pushing the price of both crude and gas higher. The Strait of Hormuz was effectively closed, cutting off Gulf supplies to the world. US and UK long-term borrowing costs rose to their highest levels in decades.

President Trump, speaking at a Republican convention, suggested the fighting would persist until after the November mid-term elections. Analysts said the mix of soaring energy and higher borrowing costs was stressing financial markets. Chris Beauchamp, an IG market analyst, said investors were growing increasingly worried about the economic fallout from higher oil prices, warning the energy price surge could heavily impact the global economy if it persists.

Concerns heightened after Iran-aligned Houthi forces seized Yemen's Red Sea port of Mokha, a key shipping route. Natural gas prices also skyrocketed, reaching 200p a therm in the UK for the first time since late 2022. Lower-than-normal storage levels and the need to build winter reserves pushed up prices. UK consumers are shielded from short-term wholesale gas price spikes by Ofgem's cap, but sustained high prices could lead to steeper bills.

The cap is slated to rise by 3.6% at the start of October, with the next increase due in January. Energy cost hikes have heightened inflation fears, pushing up global bond yields. In the UK, 10-year bond yields hit their highest since 2007, while 20- and 30-year bond yields were at levels unseen since 1998. This signals a higher borrowing cost for the government at a time when public finances are strained. Higher rates also affect consumer loan rates for financial products like fixed-rate mortgages.