Fuel price relief could be short-lived as markets react to Middle East violence

Anyone celebrating the recent falls in petrol and diesel prices may want to put the champagne on ice; escalating violence in the Middle East has caused global oil prices to rise, ahead of a budget where Labour is widely expected to reverse the previous government’s 5p a litre cut in fuel duty.

So far, the global market’s response to Israel’s actions against Hamas and Hezbollah, and Iran’s rocket attacks on Israel, has been relatively muted. The price of a barrel has risen by around five dollars – reversing the previous downward trend – because analysts say the underlying market conditions of a global economic slowdown remain the dominant factor. However, history shows retailers are typically quick to increase prices at the pump when wholesale prices rise.

So it seems likely that some of the recent gains will be lost as a result of the shift in global prices, and all at a time when drivers are anxiously anticipating budget measures from Labour chancellor Rachel Reeves. Pundits agree she is considering reversing the Tories’ 5p cut in fuel duty, and the many siren voices encouraging her to move further in pursuit of green goals could provide cover for an even bigger raid on drivers’ wallets.

If that’s the case, like the rest of us, Reeves will be hoping the crisis in the Middle East doesn’t cause a major oil price spike, but analysts appear to be hedging their bets. Sky News quotes Susannah Streeter, head of markets at analyst Hargreaves Lansdown, saying that upwards pressure is likely to continue while uncertainty remains around the possible extent of the conflict, even though concerns are being mitigated by reduced Chinese demand for oil and a presumption that Saudi Arabia will open the taps to take advantage of any disruption to supply.

The Daily Mail reports that a major escalation in the conflict could see oil prices ballooning, saying that “defence chiefs have warned Israel could target Iran’s refineries”. The Mail also reports fears that Iran could in turn disrupt global oil supplies through shipping lanes, quoting SEB commodities analyst Bjarbe Schieldrop: “If all of Iran's export capacity was damaged and they couldn't export, why would they stand back from blocking the Strait of Hormuz?”, he said. “That would be a worst-case scenario, but then the oil price would go ballistic.”

Another analyst, Fawad Razaqzada at City Index, is quoted by The Sun: “The extent of Israel's response to Iran will influence how much geopolitical risk markets factor in. Crude oil could rise by another $5 in the next few days if we see further escalation in the conflict,” he said. That could add as much as 13p a litre to the pump price.