Brent crude hits $100 a barrel for the first time since July, after US strikes on Iranian oil tankers and Houthi attacks on Saudi oil facilities pushed the international oil benchmark up more than two per cent in Wednesday morning trading, raising fresh concerns about global supply and the outlook for UK interest rates.
The move past the century mark rattled financial markets. ‘$100 is a psychological level that matters for markets,’ said Kathleen Brooks, research director at XTB. ‘If the oil price rises above this level it will give many central banks no choice but to hike rates, it will increase costs for businesses and consumers and ultimately could weigh on economic growth.’
Brent crude hits $100 and the Bank of England faces a difficult call
The pressure on the Bank of England is already visible at the top. Speaking to MPs on Tuesday, Bank of England governor Andrew Bailey warned that energy prices could rise even higher if the conflict continues. Bailey said inflation risks were ‘to the upside,’ adding that energy prices ‘could be higher still’ due to continued fighting in the Middle East. ‘The conflict is still going on and it is also causing a high level of energy prices and quite a bit of volatility in energy prices,’ he said, adding that turbulence was ‘feeding through into financial markets.’
The stakes for monetary policy are concrete. According to BBC News, the Bank’s own modelling suggests that in a worst-case scenario where oil prices hold at $100 a barrel, inflation could reach 3.2% in 2026, well above the Bank’s 2% target. The Bank currently holds its Bank Rate at 3.75%, having brought it down from the peak reached after a cycle of 14 consecutive rises that took borrowing costs from 0.1% to 5.25%, as reported by The Guardian. Any renewed upward pressure on inflation from energy costs could complicate the path back down.
The sequence of events driving prices higher unfolded rapidly. US officials said on Tuesday night that American forces had struck multiple Iranian oil tankers in response to Tehran’s attempted missile attacks on a Navy warship. Earlier in the week, Iran-backed Houthi forces attacked several major oil facilities in Saudi Arabia. Together, the two developments raised fears about the stability of supply from one of the world’s most consequential energy corridors.
FTSE slips as oil gains fail to lift the wider market
London’s equity market reflected the unease. The FTSE 100 fell on Wednesday morning, with gains for oil majors BP and Shell insufficient to offset broader selling pressure across the index.
‘The lack of enthusiasm was felt within a broad markdown, with the oil majors being among the few to offer any resistance, alongside Computacenter which gained again after pleasing interim results yesterday which led to a broker upgrade,’ said Richard Hunter, head of markets at Interactive Investor.
Hunter also noted that the rising oil price and air traffic control problems, which have affected British Airways, left parent company International Consolidated Airlines under pressure. Burberry fell after a broker downgrade. The index has gained 8.6 per cent this year but has recorded losses every day this week. The FTSE is, in Hunter’s words, ‘caught in a range at present from where there seem few positive catalysts on the immediate horizon.’
With Brent crude hits $100 now a live reality rather than a risk scenario, the Bank of England’s next rate decision will be watched closely for any sign that policymakers are prepared to respond. Bailey has already put the direction of travel on record: upside risks to inflation, and a conflict that shows no sign of easing.
