Petrol prices may jump higher as oil spikes amid Middle East tensions
UK motorists might be heading towards higher petrol and diesel prices when they fill up the tank in a couple of weeks as oil prices surged amid rising tensions in the Middle East, a situation that could lead to the cost of everyday goods jumping.
Currently the fuel prices in the UK are 134.79p for petrol and 139.36p for diesel, according to figures from RAC.
At the time of writing, Brent (BZ=F) crude rose by 2.1% to $75.11 per barrel, while the US West Texas Intermediate (CL=F) climbed 2.3% to $71.42.
Higher oil prices would add pressure to inflation, the rate at which prices increase, but the first impact would be felt at the forecourt.
It can take about 10 days for crude oil prices to filter through to petrol and diesel prices. So if oil prices continue to climb, filling the tank is likely to cost more.
At the moment, the cost of filling a 55-litre family car is almost £4 cheaper than a month ago. Average prices for petrol and diesel across UK forecourts are nearly 7p per litre cheaper than a month ago, sinking to their lowest level in almost three years.
Energy bills could also increase as wholesale gas prices also moved higher, amid concerns about supply disruptions.
Brent crude prices pushed higher after Iran's ballistic missile strike on Israel provoked fears of a wider regional conflict. There are fears in the West that a wider war could choke oil exports from the Gulf that pass through the Strait of Hormuz, which borders Iran, and push prices higher.
Brent briefly spiked more than 5% on Tuesday following the Iranian assault, which was preceded by a warning from the US.
The Israeli prime minister has vowed to retaliate after Tehran fired a wave of at least 180 missiles at Israeli cities in the centre and south of the country yesterday.
"There is no doubt that after the recent retaliatory attacks by Iran on Israel, the main concern for traders is the Iranian oil, gas, and nuclear structures. More importantly, what traders are looking at is a potential situation under which Iran's oil structure faces major disruption, and we see oil prices shooting towards the sky," Naeem Aslam, chief investment officer at Zaye Capital markets, said.
Iran is among the top 10 oil producers globally, with production reaching over 3.3 million barrels per day in August — the highest in five years.
"A major escalation by Iran risks bringing the US into the war," Capital Economics said in a note. "Iran accounts for about 4% of global oil output, but an important consideration will be whether Saudi Arabia increases production if Iranian supplies were disrupted."
Axios has reported that Israeli officials are considering a “significant retaliation” to the Iranian attack within days that could target oil production facilities inside Iran and other strategic sites.
Before the escalation of the Middle Eastern crisis, oil prices had been on a downward path for weeks — and prices are well below the $90 per barrel level a year ago despite the conflict.
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However, if the situation escalates further to the point where it hits the global oil supply, UK households risk feeling the increase of prices when going to the supermarket or filling their tank.
Gas prices moved higher after reports that Chevron (CVX) shut its major Tamar and Leviathan gas platforms as a precautionary measure after Iran fired about 200 ballistic missile at Israel.
Investors are concerned that Egypt, a key buyer of Israeli fuel, will turn to global market for natural gas, raising demand.
Trafigura chief economist Saad Rahim told Bloomberg TV: “No one really know how far this could spread.
“If we start seeing LNG shipments out of Qatar being disrupted, that has global implications.”
In a worse case scenario, the World Bank’s October ‘large scale disruption’ scenario would see UK inflation soar to over 7%.
A previous report by the Office for Budget Responsibility (OBR) said: "This involves a cut to Middle East energy supplies comparable to the 1973 oil embargo. In this scenario, wholesale oil and gas prices both rise to 75% above our central forecast.
"Gas prices peak in early 2025 and oil prices peak in mid-2024 at an all-time nominal high. After a year, prices of both commodities quickly fall back to our central forecast. We also assume that disruption to global supply chains for goods intensifies and peaks in the final quarter of 2024.
"In this scenario, CPI inflation reaches a peak of 7.4% in the second quarter of 2025."
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UK inflation is currently at 2.2% after hitting 11.1% in October 2022, a 41-year high that forced the Bank of England to raise interest rates consecutively to 5.25% to tackle the price increases. The BoE has now started to ease borrowing costs, cutting interest rates to 5% in August.
Despite the doomsday scenario, there are no indications that the oil market will actually be disrupted.
"The market is likely to remain jumpy for now on the what-if, particularly while it awaits Israel’s retaliation and those with short positions buy into any dips to exit their positions to avoid the risk of being caught by another leg higher," Callum Macpherson, head of commodities at Investec, said.
"There might not ultimately be any disruption to supply though, so current events do not necessarily change the narrative for the oil market," he added.
Even in the event of a supply disruption, there are hopes that oil cartel the Organization of the Petroleum Exporting Countries and allies (Opec+) that controls a large proportion of global supplies, will pick up production. Saudi Arabia is warning that prices could fall as low as $50 per barrel, the Wall Street Journal reported.
"These worries are being mitigated by expectations that Saudi Arabia will turn on the taps more fully, and lower demand from China, but upwards pressure is likely to continue while uncertainty reigns about just how far conflict will spread," Susannah Streeter, head of money and markets at Hargreaves Lansdown, said.
In equity markets, oil majors BP (BP.L) and Shell (SHEL.L) were among the top performers on the FTSE 100 (^FTSE).
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