Investors have learned to live with geopolitical noise in recent years, often to the point of complacency, but the escalation of conflict in the Middle East has acted as a fresh stress test for markets that were arguably already carrying a high degree of uncertainty. Our thoughts remain with all of those affected by the conflict, but it is an investor’s job to assess what the ramifications of the ongoing crisis could be.
This week, a spike in energy prices has driven the benchmark Brent Crude oil price to levels not seen since 2022. Whilst Donald Trump claims that the surging oil market is ‘a small price to pay’ for the eradication of Iran’s nuclear programme, a prolonged period of elevated pricing could have serious implications for the UK where our capacity for gas storage is too low, and domestic energy production has long been in decline. Our electricity prices are already some of the highest in the world, so this could yet be just another hurdle for businesses to contend with in an already fragile economic climate.
Along with rising petrol and utilities costs, higher energy prices could quickly filter into food costs, lifting headline inflation rates and complicating the Monetary Policy Committee’s path. Rate cuts pencilled in for later this year have already been priced out of the market and there are fears that the Bank might even have to tighten policy even as domestic demand remains fragile, potentially exacerbating any economic downturn.
In order to cushion households from energy shocks, history suggests that Chancellors reach for temporary subsidies and fuel duty freezes, but such measures would only add to borrowing at a time when the public finances are already stretched. The duration of the conflict will be important, but for now at least, the market’s response has been relatively measured.
Capital at risk.
