Oil prices hit $100 a barrel for the first time since May on Thursday, surging more than 6% as Houthi militias in Yemen attacked oil tankers in the Red Sea, threatening a key export route Saudi Arabia has used to bypass the Strait of Hormuz. The escalation comes after a temporary US-Iran ceasefire failed, and US Secretary of State Marco Rubio said the people in charge in Iran were "not ready to make a deal". US military strikes against Iran have stepped up in recent days, reigniting fears over global energy supplies.
The Houthis sent an email to shipping companies on Monday warning them not to load or unload at Saudi ports or face being targeted "in any location" within its reach. The group claimed that at least six ships had already changed course as a result. The Bab al-Mandab strait, through which about 4.1m barrels of crude and refined products passed each day last year, has become a vital alternative for Saudi Arabia since the US-Israeli strikes on Iran at the end of February. Riyadh has rerouted about 75% of its usual exports via a pipeline to the Yanbu terminal on its west coast, channelling roughly 2.5m barrels a day through the Red Sea to markets such as India and China.
“Oil prices hit $100 amid Houthi attacks and US-Iran conflict, threatening UK inflation and interest rates.”
"If a ceasefire does not materialise and Hormuz remains largely closed while the Houthi threat to Red Sea shipping intensifies, the risk of a significant rebound in oil prices would be substantial," said Jorge León, head of geopolitical analysis at Rystad Energy. The surge has already pushed UK petrol prices up 5p a litre since the start of July, to almost £1.56, with diesel at £1.72, according to the RAC. UK benchmark gas prices have also risen to around 150p per therm, up from 98p at the end of June. In the US, average gasoline prices have surpassed $4 a gallon, up from $3.92 a month ago, according to AAA.
"More expensive fuel and energy can ripple through the wider economy, increasing costs for businesses and ultimately feeding through into the price of food and other goods," said Jonathan Raymond, investment manager at Quilter Cheviot. "This creates another headache for central banks as they continue their battle against inflation. If energy prices remain elevated, policymakers may come under pressure to keep interest rates higher for longer or even raise them. This would come as a blow to mortgage holders and borrowers already feeling the strain."
The Bank of England has held interest rates at 3.75% in its last four meetings, and Paul Dales, chief UK economist at Capital Economics, said he believes the Bank will "almost certainly" hold them again. The development also threatens Andy Burnham's cost of living drive, as rising fuel costs risk pushing up inflation, which had fallen to 2.6% in the UK in the year to June.