The escalating conflict in the Middle East has sent shockwaves through the global economy, driving gas prices to multi-year highs and triggering a broad sell-off in stock markets worldwide as investors fret over the potential duration of the instability.
In the UK, gas prices soared to their highest level in three years on Tuesday, building on sharp gains from the previous day. Simultaneously, the global benchmark for Brent crude oil briefly topped $85 a barrel for the first time since July 2024. The uncertainty also walloped equity markets, with major indexes across the US, Europe, and Asia posting significant losses.
The selling pressure follows a series of retaliatory strikes between Israel, the US, and Iran, forcing investors to reassess the economic fallout. Key concerns centre on the potential for renewed inflationary pressure and what that might mean for the future path of interest rates, given the region’s critical role in global energy supplies and shipping lanes.
There are growing fears that this confrontation could mirror the economic disruption seen after Russia’s full-scale invasion of Ukraine four years ago, which sent energy costs skyrocketing and fuelled price hikes for businesses and consumers globally.
The UK’s fiscal watchdog, the Office for Budget Responsibility, has already warned that a widening of the conflict could severely undermine its economic forecasts, potentially delivering a “very significant” blow to both the British and global economies. These sentiments were echoed by German Chancellor Friedrich Merz following a meeting with Donald Trump at the White House, where he expressed deep concern over the potential economic damage, underscoring the global desire for a swift resolution to the fighting.
The financial markets reacted sharply. London’s FTSE 100 closed down 2.75%, while Germany’s DAX and France’s CAC 40 fell 3.44% and 3.46%, respectively. In the US, the S&P 500 opened sharply lower before recovering some ground to end the day down 0.9%. Asian markets fared even worse, with Japan’s Nikkei dropping 3.3% and South Korea’s Kospi plunging more than 7% after returning from a holiday.
Energy Markets in Turmoil
UK natural gas prices were a key focal point, briefly hitting 165p per therm—a level not seen since the early days of the Ukraine war—before settling at 138p, still more than 20% higher than Monday’s close. Prices have now doubled since the initial wave of US and Israeli air strikes on Iran over the weekend.
The surge was exacerbated by a halt in production from QatarEnergy, one of the world’s largest LNG exporters, following attacks on its facilities. The company has also paused output of other key materials like aluminium and methanol. While a UK price cap will shield households from immediate bill increases until July, the sustained rise in wholesale gas prices puts significant pressure on future energy costs.
Oil markets, while less volatile due to greater flexibility in global supply, have also climbed substantially since Friday. Sustained high oil prices have a knock-on effect across the economy, making everything from petrol and transport to food more expensive. If this leads to a persistent uptick in inflation, central banks may become more hesitant to cut interest rates in the coming months.
Shipping and Consumer Impact
Adding to the pressure, shipping through the strategic Strait of Hormuz—through which about 20% of the world’s oil and gas passes—has ground to a halt following attacks on vessels. A stark warning from an adviser to Iran’s Revolutionary Guards has urged ships to avoid the region, promising a “serious response” to any that enter.
This has triggered an unprecedented spike in shipping costs. Data shows the daily rate to hire a supertanker for a route from the Middle East to China surpassed $400,000 on Monday, nearly double the previous week’s cost. This reflects both the heightened risk and the unwillingness of insurers to provide coverage.
For UK consumers, the turmoil is likely to eventually trickle down to the forecourt. The chairman of the Motor Fuel Group, the country’s largest independent petrol station operator, warned that if oil prices remain elevated, higher pump prices are inevitable. The ultimate impact on households will depend entirely on how long the conflict persists and how high energy prices climb.
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