Global borrowing costs have climbed to levels not seen in decades after oil prices surged to $105 a barrel, reflecting fresh signs the conflict in the Middle East will not be resolved quickly. Brent crude moved back above $100 and continued to rise as fighting between the US and Iran in the Gulf intensified, tightening supply expectations and stoking inflation fears.
Market participants point to an effective shutdown of the Strait of Hormuz, which has limited oil and gas exports from the Gulf and put immediate pressure on global flows. The situation was compounded by reports that Iran-aligned Houthi forces seized the Yemeni port of Mokha, a development that could further raise the risk of shipping disruption through the Red Sea.
Wholesale natural gas prices have climbed sharply as well. In the UK, gas topped 200p per therm, a level not seen since late 2022, while European storage sits well below normal for this time of year. Traders say the need to refill reserves ahead of winter is intensifying demand and supporting higher prices.
UK consumers remain partly insulated from short-term wholesale volatility by Ofgem's price cap, but that protection is not absolute. The cap is scheduled to rise by 3.6% at the start of October, with the next adjustment due in January, leaving households vulnerable to sustained high wholesale prices.
Rising energy costs and the prospect of faster inflation have pushed up yields on government bonds globally. In the UK, yields on 10-year gilts reached levels last seen in 2007, while 20- and 30-year yields climbed to rates not seen since 1998. Higher long-term yields increase the government's borrowing bill and can feed through to consumer finance, for example by raising costs on some fixed-rate mortgages.
Political signals are adding to market unease. Speaking at a Republican gathering in Texas, President Trump said he expected the fighting to continue beyond the US mid-term elections in November, a view that markets interpreted as a sign the disruption could persist in the near term. With oil, gas and bond markets all repricing for a prolonged period of instability, the immediate outlook is for continued volatility unless the conflict eases.
