Brent’s jump to four-month highs on Hormuz and Saudi supply fears lands three days before the MPC’s next rate decision, reviving the inflation risk the Bank has been tracking since the conflict began
Brent crude broke through $108 a barrel on Monday, its highest level since May, after a weekend of escalating disruption to Gulf oil infrastructure left traders pricing in the prospect of a deeper and more prolonged supply shock. West Texas Intermediate rose in tandem to around $102, with both benchmarks extending a rally that has taken Brent up more than 18% this month alone.
Two developments drove the latest leg higher. Saudi Arabia shut its East-West pipeline, the 7 million barrel-a-day link that carries crude to Red Sea export terminals and had served as the kingdom’s main workaround for avoiding the Strait of Hormuz, after a drone attack. Almost simultaneously, a merchant vessel was struck inside the strait itself, killing one crew member, while Oman postponed talks between Iran and Gulf states that had been billed as a step toward a framework for safer shipping through the waterway. Crude flows through Hormuz, which carried around a fifth of the world’s oil and LNG before the conflict began, have fallen to roughly 7 million barrels a day from around 20 million previously.
The pressure is already visible in refined product markets. US diesel prices broke $6 a gallon for the first time in history on Friday, up from $5.85 a week earlier and around 60% higher than a year ago, while petrol has been setting records of its own. Analysts split the blame between the loss of Hormuz-linked supply, put at roughly 1.2 million barrels a day, and Russia’s ban on diesel exports following Ukrainian strikes on its refineries, worth around 800,000 barrels a day. Between the two conflicts, close to 5 million barrels a day of refining capacity is now offline.
Why it matters for UK policy
The timing is awkward for the Bank of England. UK CPI inflation stood at 2.6% in June, already above the Bank’s 2% target, and before the Middle East conflict intensified, the MPC had expected it to ease back toward target through the second half of the year. That projection has since been abandoned: the Bank’s July forecast round showed inflation peaking at around 3.2% in the fourth quarter under a scenario built around continued Gulf disruption, with the Bank explicitly warning that risks to that outlook “are tilted to the upside.” Bank Rate has been held at 3.75% since the spring, and markets that had been pricing a cut earlier this year have largely abandoned those bets as energy costs have climbed.
The next Monetary Policy Committee decision lands on Thursday, three days after Monday’s price surge, putting policymakers in the position of setting rates against a live and worsening supply shock rather than a settled one. A further leg higher in oil, sustained through the rest of the week, would only add weight to the case for holding rates for longer, and potentially revive talk of a further hike should second-round effects on wages and domestic prices start to show through.
Not every analyst is convinced the spike will stick. ING’s commodities team said Monday it was maintaining a base case of $80 a barrel for Brent in the fourth quarter, noting that “sizeable volumes of oil” are still moving through the strait despite the headline disruption, even as it acknowledged the near-term picture remains highly fluid. UK equity and currency markets took the news calmly enough on Monday morning, with the FTSE 100 firmer and sterling little changed against the dollar, suggesting investors are for now treating this as a geopolitical risk premium rather than a fresh demand shock.
The wealth management angle
For UK advisers, the read-through is less about a single data point than about the range of outcomes now back on the table. A Bank of England that has to hold, or even raise, rates into a slowing economy changes the calculus for duration risk in fixed income portfolios, for sterling-denominated cash and money market allocations, and for clients relying on falling mortgage and borrowing costs to underpin spending plans. Energy-linked equities and inflation-protected gilts stand to benefit from a sustained oil shock, while sectors sensitive to input costs and consumer discretionary spending face the opposite pressure. With Thursday’s MPC decision now arriving into a genuinely live inflation debate rather than a formality, it is worth ensuring client portfolios are positioned for more than one outcome rather than the soft-landing scenario the Bank was still describing as recently as July.
