Strikes on Iran by the US and Israel have led to widespread attacks in the Gulf region, with the widening conflict already having a huge knock-on effect on commodity prices.
Oil is up by almost 18 per cent in a week while the price of natural gas has shot up by 93 per cent since the conflict began - its highest level since early 2022.
Experts say UK homes are unlikely to see any immediate impact on energy bills as a result of the escalating crisis. Gas wholesale prices affect the energy price cap set by regulator Ofgem in the UK and these global events will be factored into the next cap - but that only takes effect from July.
But there are fears that a long period of global volatility could lead to price hikes in the longer term, with a hit to summer stock refilling efforts gradually pushing up prices for the winter.
Dr Craig Lowrey, principal consultant at analysts Cornwall Insight, said: “The UK’s dependence on global gas markets means movements in international wholesale prices feed directly into domestic bills.
“For those customers on the price cap, the April to June price is now set, and therefore there should be no immediate impact on bills.
“Looking ahead, the cap is calculated using an average wholesale price over three months, and we are only at the very start of the July to September assessment period, so the long-term impact will depend on how long gas prices stay elevated and how long this period of volatility remains.”
Jess Ralston, head of energy at the Energy and Climate Intelligence Unit (ECIU), explained that incorporating renewables into the mix more since 2022 means the shock will be lower. But she added that more still needs to be done if Britain wants to reduce reliance on external factors affecting household bills.
“The Energy Crisis Commission warned that the UK remained dangerously underprepared for another energy crisis. Nobody knows exactly how the next few weeks will play out, but with homes and businesses still facing the debt and after-effects of the last gas crisis, people will understandably be concerned,” Ms Ralston said.
“Fortunately, any looming crisis is unlikely to hit electricity bills quite as hard because more renewables have been linked up to the grid meaning we don’t have to run gas power stations as much. Last year renewables cut the wholesale price of electricity by a third.”
The energy price cap currently stands at £1,758 per year, and is due to fall to £1,641 from 1 April.
Why have gas prices increased?
Qatar halted production of liquified natural gas (LNG) after strikes by Iran in the area. As Qatar is responsible for around 20 per cent of global supply production, it has led to a spike in price and concerns over supply.
Europe is a small buyer from Qatar - about 10-15 per cent of the bloc’s total imports come from there - but other parts of the world buy heavily from the Qatari supply and will have to source their gas elsewhere, which raises demand and in turn increases the price. Between them, China and India account for around a third of Qatari-produced LNG.
In turn, there are concerns that if US gas starts to climb in price - where Europe sources a majority of its import - as a result of the situation in Qatar, there will be a bigger hit on Europe.
.png)
Kathleen Brooks, research director at XTB, said: “The European market should be able to absorb a few weeks of disruptions to Qatari LNG flow.
“However, if Qatar’s production takes longer to come back online, or if it cannot be exported due to the dangers of tankers travelling through the Strait of Hormuz, then we may start to see US gas prices rise.”
She said that European Natural Gas was up by around a quarter on Tuesday but that the chances of an immediate return to the situation of three years ago after Russia’s invasion of Ukraine - which saw energy bills spike sharply and global inflation soar - was improbable, at least in the short term.
“For now, the chances of that are low. In 2022, when Russia invaded Ukraine, the price spike was combined with a very low inventory (spare stock) of European gas, which sent prices soaring.
“While gas inventories tend to be slim, Europe is much less reliant on gas from Russia and the Middle East and instead gets the bulk of its LNG from the US, another major producer,” Ms Brooks explained.
She added: “So far, US gas prices have risen by a moderate 6 per cent, compared with an 82 per cent increase in European prices in the past week.
“We will be watching US gas prices closely in the coming days; any significant uplift to these prices would signal another energy price shock for Europe is coming.”
Interest rates and inflation
Meanwhile, oil has surged to above $80 a barrel from around $70 last week, which could have an impact on inflation and interest rates down the line.
But the true impact on UK businesses and households may be dependent on how short or long the disruption to production lasts.
A three-scenario forecast by Deutsche Bank analysts considered the inflationary impact of oil and gas prices continuing to rise across the coming weeks if the Strait of Hormuz remains closed. The suggestion saw inflation reaching between 2.9 - 3.3 per cent later this year if oil rises to $100/barrel and gas follows a similar trajectory, taking a further two years to return to about the level of inflation currently seen in the UK.
In terms of how “bad” this price rise is, a wider context is important.
As noted, the twin impact of supply being cut off and low spare gas inventory is a big part of what pushed prices so high in 2022. As the below chart shows, prices are currently well below those levels even after this week’s spike.
.png)
However, the longer uncertainty reigns in both production and supply, the quicker prices can move upwards.
“Energy costs continue to mount as Lebanon has been drawn into the conflict and Gulf states are still reeling. Iran is now threatening to set fire to ships using the crucial Strait of Hormuz. Given that it’s an essential route for around a fifth of global oil and gas supplies, this has sent energy prices even higher,” explained Susannah Streeter, chief investment strategist at Wealth Club.
“LNG wholesale costs had already jumped after the world’s largest LNG export plant was closed following a strike by an Iranian drone. European and UK gas futures have surged to their highest level since January 2023.
“This highlights the risks of reliance on volatile imports and adds urgency to the need to accelerate the transition to renewables, which still requires significant grid and storage upgrades. Companies already counting the high energy costs in the UK are now bracing for further financial pain.”
How will UK petrol prices be affected by US-Iran war and rising cost of oil?
Starmer considers sending warship HMS Duncan to Middle East after Iran strikes
Iran-US war live: Trump says he told Tehran ‘too late!’ for talks as strikes continue
Average price for a gallon of gas rises 11 cents overnight to about $3.11 in US, AAA says
Unemployment to jump to 5.3% as UK economy faces slower growth, says OBR
Thousands of Tesco staff to receive share of huge £134 million windfall
