UK stock markets rose on Wednesday despite continuing energy price volatility over fears the US-Israel war with Iran may drag on.
In London, the FTSE 100 index edged up alongside rises on markets in Germany and France, contrasting with Asian shares which fell for a third day.
Oil prices increased by more than 1% to about $83.50 a barrel, as Saudi Arabia’s defence ministry reported an attempted drone attack on the Ras Tanura oil refinery – the second time this week it has been targeted.
David Miles, committee member at the Office for Budget Responsibility, the government’s independent forecaster, said if oil and gas prices remain elevated, it would add to inflation in the UK.
However, he said it was important to note the increases were “nowhere near as large” as those seen after Russia launched its full-scale invasion of Ukraine four years ago.
“If prices stayed where they were at the moment, probably we’re talking about an impact on the level of prices in the UK maybe of 1% or so,” Miles said.
Brent crude prices have jumped by 15% since Israel and the US began bombing Iran on Saturday and Tehran responded by attacking neighbouring Arab countries.
At the same time, one of the biggest producers in the world state-run QatarEnergy suspended production of Liquified Natural Gas (LNG).
Gas prices continued to be volatile on Wednesday, hovering around 127p per therm by midday, below Tuesday’s high of 170p.
Around a fifth of the world’s oil and gas usually flows through the Strait of Hormuz – a narrow waterway between Iran and the United Arab Emirates (UAE).
But traffic through the Strait of Hormuz has almost entirely halted following Iran’s threats to “set fire” to ships.
A line chart titled ‘Gas prices surge after attacks on Iran’, showing the futures (April contract) price for UK natural gas, in pence per therm. At the end of December, the price was around 39p. That rose to a high of 217p in late August 2022 after Russia’s invasion of Ukraine, before falling again. It then rose sharply again to around 144p on 4 March 2026, after the US’s attacks on Iran. The source is Bloomberg.
According to Lloyd’s List Intelligence, about 200 tankers have been effectively stranded, while insurance premiums – particularly on vessels considered American, British or Israeli – have risen significantly.
On Tuesday, President Donald Trump said the US would provide risk insurance “at a very reasonable price” and use the Navy to protect oil tankers “if necessary”.
However, experts warned his assurances might not be enough to ease companies’ concerns, and the president did not detail how an escort through the strait would work.
Lindsay James, investment strategist at wealth management firm Quilter, told the BBC she believed markets had taken an “optimistic view” of the situation, because in reality Iran was well equipped to repel any ships using the strait.
“Shipping companies, insurers, crew members, potentially, are probably going to be reluctant to do this … It’s not really feasible to think that that is going to be the solution to reopening energy supplies,” she said.
“The solution is going to be a peace agreement, and it feels like we’re some way away from that.”
US Treasury Secretary Scott Bessent said on Wednesday that crude oil markets “are very well supplied”.
Map of Strait of Hormuz
Stock markets have fallen sharply since the US and Israel attacked Iran over the weekend, and many Asian stock markets have been hit particularly hard as the region imports large amounts of energy from the Middle East.
South Korea and Thailand stock markets were forced to temporarily halt trading after plunging by more than 8% and triggering so-called circuit breakers, which aim to avoid panic-selling.
James Hosie, oil and gas equity analyst at Shore Capital said roughly 80% of Qatar’s LNG goes to Asian markets.
“Those consumers will now be bidding up the price of LNG cargoes to secure alternative supplies, as is now being seen with the spike in Asian LNG prices,” he said.
“There obviously is a knock-on effect to the price of gas elsewhere, including the UK, where LNG helps balance demand with supply.”
Risk to UK inflation and interest rates
In the UK, Chancellor Rachel Reeves is set to meet with North Sea energy bosses on Wednesday afternoon to discuss the implications of the Middle East conflict “and work with them to manage this uncertain period”.
James told the BBC that investors are forecasting higher inflation in the UK “and that could take one of the interest cuts that was pencilled in off the table”.
Markets had projected that the Bank of England could cut interest rate twice this year as inflation eased.
The National Institute of Economic and Social Research, an economic think tank, said if higher energy prices persist, it could force the Bank of England to push interest rates back up, above 4%.
The Bank of England will announce its latest interest rate decision on 19 March.
BBC