Surging oil prices after Iran strikes could pressure household budgets

Oil prices are expected to surge following the US and Israel's latest strikes against Iran, analysts have warned.

It threatens to pile more pressure on household budgets with higher crude costs pushing up petrol costs and stoking inflation, making it harder to lower interest rates for borrowers.

Fuel costs rose last week as energy traders grew increasingly anxious about potential military action in the Middle East, following Donald Trump's deployment of a US naval armada to the region.

But crude prices are now set to rise sharply when markets reopen on Monday due to concerns that the latest flare-up will disrupt oil exports through the Persian Gulf.

This is because Iran has the third-largest crude reserves in the world and also controls the Strait of Hormuz, a narrow shipping lane through which around 20 per cent of all the world's oil and gas passes each day.

'The closure of the Strait…would be hugely disruptive, particularly for other major oil producers in the region like Saudi Arabia,' said Susannah Streeter, chief investment strategist at broker Wealth Club.

She highlighted that Iran previously closed the strait for military drills in February, indicating the 'fragility' of the shipping routes' ability to keep oil flowing.

These concerns were evident last week when Saudi Arabia and other Gulf petrostates such as the United Arab Emirates rushed to export oil as fears rose of an imminent US strike.

Helima Croft, an analyst at RBC Capital, told the Financial Times that oil prices could rise as high as $100 a barrel if Iran closed the Hormuz Strait, an increase of 37 per cent from their closing level on Friday of $72.

Such a rise would reverberate across the global economy as firms adjusted prices to offset the sharp rise in energy costs, potentially adding as much as 0.7 per cent to inflation, according to analysts at Capital Economics.

Such a rise would also complicate efforts by the Bank of England to bring down interest rates, meaning mortgage holders and other borrowers could face higher repayment costs for longer.

'For the Bank of England, given how finely balanced the voting is [on whether to cut interest rates], I do think this might make it a little trickier to forge ahead with a cut until we have more clarity on the scale of the initial oil price reaction and how long it might last,' Hetal Mehta, chief economist at money managers St James's Place, told the FT.