Oil and gas prices surge as Middle East conflict sparks global bond sell-off

Global financial markets suffered a sharp sell-off on Thursday as escalating military clashes in the Middle East pushed oil prices past $109 a barrel, driving government borrowing costs to multi-year highs and stoking fresh fears of global inflation.

The market panic was triggered by a rapid deterioration of security in the Gulf. On Wednesday, Iran's Islamic Revolutionary Guard Corps said it had attacked 10 ships near the Strait of Hormuz, in retaliation for US strikes on five Iranian oil tankers. The crisis deepened on Thursday when Iran-aligned Houthi forces seized the Yemeni port of Mocha on the Red Sea, threatening to choke off key crude shipping lanes.

Brent crude futures jumped to $109.20 a barrel on Thursday, representing a rise of more than 50 per cent from its recent lows in July. In the US, West Texas Intermediate crude surpassed $100 a barrel for the first time since May, rising to $102.50.

It is not just oil. Wholesale gas prices in the UK climbed above 200p a therm for the first time since late 2022. European gas reserves are unusually low for this time of year, and the rush to secure supplies ahead of winter has added further upward pressure on prices.

Why this matters to households

The energy spike has immediately rattled bond markets, where investors are dumping government debt on the assumption that central banks will have to keep interest rates higher for longer.

In the UK, the yield on 10-year government bonds climbed past 5.37 per cent, the highest cost of state borrowing since 2007. This spike presents a direct challenge for the new chancellor, John Healey, whose first budget is scheduled for 28 October. Higher debt yields will eat into the Treasury's financial room for manoeuvre and raise the cost of public investment projects.

Consumers are already feeling the squeeze. The motoring organisation the RAC reported that UK petrol prices have risen by 6p a litre since the start of September. High wholesale gas prices will eventually feed into household bills, despite protections from the energy price cap.

In the US, the average price of a gallon of regular petrol has reached $4.28, according to the American Automobile Association.

Central banks prepare to act

In Washington, the yield on 10-year US government debt rose to 4.92 per cent, while 30-year yields reached their highest level since 2007. The sell-off occurred despite an intervention on Wednesday by US Treasury Secretary Scott Bessent, who attempted to calm markets by buying back $6 billion of government debt. Investors ignored the move and continued selling.

Central banks are already tightening policy. The European Central Bank raised its benchmark interest rate to 2.5 per cent on Thursday. ECB President Christine Lagarde warned that the conflict in the Middle East is generating persistent inflationary pressures that will keep rates higher for longer.

The Federal Reserve, led by its new chair Kevin Warsh, meets next week to set US interest rates. Financial markets are now pricing in a 70 per cent chance of a rate hike, up from 61 per cent earlier in the week.

A rate hike would anger President Donald Trump, who has publicly demanded cuts. Speaking at a Republican convention in Texas on Wednesday, Trump suggested the conflict in the Gulf would continue until "immediately after" the US midterm elections in November, after which he claimed energy prices would tumble.