Oil price jumps as US-Iran clashes raise odds of interest rate rises

Energy prices later stabilise after Trump abandons plan for 20% levy on traffic through strait of Hormuz

Oil and gas prices jumped and expectations of interest rate rises in Europe increased on Tuesday after the US carried out a third night of military strikes against Iran.

However, they later eased back after Trump said he would abandon his proposal for the US to levy a 20% fee on cargo passing through the strait of Hormuz.

Brent crude, the international benchmark for oil prices, initially rose by as much as 4.6% to $87.08 a barrel on Tuesday, its highest level in just over a month, before settling at about 1% up.

The market swings came after Trump said the strait would stay open “with or without Iran” but that the US would require transiting ships to pay a 20% charge “for any and all costs necessary” to provide security and safety for vessels.

That sent gas prices higher on Tuesday, with the Dutch natural gas contract for August delivery, the European benchmark, up nearly 3% to €52.8 a megawatt hour, the highest since early April.

The UK natural gas contract for August delivery climbed 3.3% to 129.4p a therm, the highest level in more than three months.

Fears over higher inflation linked to the oil price rise fed expectations of interest rate rise by the Bank of England and European Central Bank.

For the first time in a month, financial markets priced in a quarter-point UK rate rise by September, likely followed by another one by the end of the year. Traders have also forecast that the ECB will raise rates by a quarter point in September, and another increase by the end of December.

At the start of the month, swaps priced less than a quarter-point rise for the Bank of England and ECB, when a fragile ceasefire was in place between the US and Iran.

UK government bond yields rose to their highest level ‌since May, with the 10-year gilt going above 5% for a period before coming down to 4.97%.

The UK’s blue-chip FTSE 100 index slipped 0.4% in early trading, despite rises in two of its biggest constituents, the oil companies BP and Shell, which were up 2.4% and 1.7%, respectively. It later settled to slightly up after Trump ditched the fee plan.

The Stoxx Europe 600, which tracks the biggest companies on the continent, dropped 0.5% before ending slightly up.

In Asia, stocks were more mixed thanks to a rebound in technology shares. South Korea’s Kospi and Japan’s Nikkei 225 rose 07%, while the Chinese Shanghai Composite was up 1.4%.