Oil prices jumped 5% on Thursday as worsening tensions in the Middle East raised fears of further disruptions to crude supplies, while a strengthening hurricane threatened production in the Gulf of Mexico.
Brent crude, the global benchmark, climbed to $105.30 a barrel, intensifying pressure across financial markets as investors assessed the inflationary impact of higher energy costs.
The rise in oil prices was accompanied by renewed selling in global bonds and equities, with investors increasingly concerned that a prolonged energy shock could force central banks to keep interest rates higher for longer.
In the UK, the yield on the 10-year government bond rose six basis points to 5.515%, its highest level since July 2007. The yield on the 30-year gilt also increased to 6.0117%, after reaching 6.036% on Wednesday, the highest level since January 1998.
Higher borrowing costs could add to the pressure facing Chancellor John Healey ahead of his first budget on 28 October, as the government contends with rising costs of servicing its debt.
US weighs further strikes on Iran
The latest market volatility followed a report by The Atlantic that the White House had asked the Pentagon to prepare options for possible strikes against Iran before the US midterm elections.
The report, citing unnamed officials in Donald Trump’s administration, said discussions were still under way over the potential targets and scale of any operation, as well as whether the strikes would ultimately be carried out.
The development has raised fresh concerns that the conflict could escalate before next month’s midterm elections, despite earlier expectations that Trump might avoid a major expansion of US military action during the campaign period.
The Atlantic reported that a limited operation could potentially be followed by a larger military action after the elections.
Any further US or Israeli strikes on Iran could increase the risks to oil supplies from the region, with the conflict already in its eighth month.
Hormuz disruption adds to supply fears
Concerns have intensified around the Strait of Hormuz, a key route for global energy shipments, where attacks on tankers have increased and maritime traffic has been disrupted.
The latest reported incident occurred on Wednesday when a tanker was struck by projectiles off the northern coast of Qatar, causing casualties, according to the United Kingdom Maritime Trade Operations.
The continued attacks have raised fears that further disruption around the waterway could restrict the flow of crude and other energy products from the Gulf.
Hurricane threatens US production
The oil market is also facing supply concerns closer to the United States after Tropical Storm Isaias strengthened into the first hurricane of the Atlantic season.
The storm is expected to reach the US coast on Friday or Saturday, prompting energy companies to shut down some offshore production in the Gulf of Mexico.
Shell and Chevron said they were halting production as the hurricane approached, adding another potential source of disruption to global crude supplies.
Shipping costs add to inflation worries
Higher energy costs are also feeding through to other parts of the global economy.
Danish shipping company Maersk said on Thursday that it would raise its emergency fuel surcharge on export collections and import deliveries, citing the increase in fuel costs.
The combination of higher oil prices, rising shipping costs and continuing geopolitical uncertainty has renewed fears of a broader inflationary shock.
Investors are now weighing the possibility that central banks could be forced to maintain or increase interest rates if energy-driven inflation becomes more persistent.
The developments have added to the pressure on financial markets, where rising government borrowing costs and concerns over the economic impact of an extended Middle East conflict are already weighing on investor sentiment.
