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Energy markets remain extremely volatile as the conflict in the Middle East continues to develop. Prices are moving up and down throughout the day, making it difficult to give a definitive outlook at any one moment.
In many ways, the market currently resembles a tug of war. One moment prices rise on fears of supply disruption, the next they fall on speculation that the situation may de-escalate.
While the initial shock of the conflict has settled slightly, the market remains highly sensitive to political developments and military activity across the region.
Following sharp movements earlier in the week, energy markets briefly stabilised after political comments suggested the conflict could come to an end sooner than expected. However, this stability has been short lived.
Oil prices have continued to fluctuate as new developments emerge, including attacks on commercial vessels and escalating military activity across the region. Brent crude has recently moved back towards the $100 per barrel mark after briefly peaking significantly higher during the early stages of the crisis.
The volatility reflects a market that is reacting to every new headline.
Much of the concern centres on the Strait of Hormuz, one of the most strategically important shipping routes in the world.
Around 20 percent of the world’s oil and gas normally passes through this narrow corridor connecting the Persian Gulf to global markets.
Recent attacks on commercial ships and warnings from Iran have dramatically reduced traffic through the strait, creating significant disruption to global energy flows.
Several vessels have been damaged in recent incidents and shipping companies remain extremely cautious about using the route.
Even when the waterway remains technically open, the risks to crews, vessels and insurers can effectively shut down traffic.
To calm markets and maintain confidence in global energy supply, major economies have begun to intervene.
The International Energy Agency has announced the largest strategic oil release in history, with around 400 million barrels being made available from global reserves.
The aim is not necessarily to push prices significantly lower, but to reassure markets that additional supply can be brought online if disruption continues.
These types of interventions often act as a stabilising signal for traders and can help prevent panic-driven price spikes.
Despite the uncertainty, there are some encouraging developments.
Saudi Arabia’s energy giant Aramco has been working to reroute a large portion of its exports through alternative pipelines, allowing oil to bypass the Strait of Hormuz and reach the Red Sea.
This could help restore around 70 percent of normal export volumes if the pipeline capacity is fully utilised.
Alternative supply routes will not replace the strait entirely, but they can reduce the immediate pressure on global markets.
Energy markets move in a chain.
Typically, natural gas prices follow movements in oil markets, while electricity prices tend to follow gas.
This means geopolitical events affecting oil supply often ripple across the entire energy market.
For UK businesses, this connection explains why electricity costs can move even when the initial disruption appears to be thousands of miles away.
Despite the global uncertainty, the UK’s short-term energy supply fundamentals remain relatively strong.
Storage levels and diversified supply sources mean the country is not facing the same immediate supply pressures as some other regions.
Importantly, while prices have risen and volatility remains high, we are still not seeing the extreme price levels experienced during the last major energy crisis.
However, the situation remains highly fluid. Any escalation in the conflict or further disruption to shipping routes could quickly change market sentiment.
At this stage, continued volatility is the most likely scenario.
Markets will continue to react to developments such as:
Decisions by major oil-producing nations
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For businesses that rely heavily on energy, monitoring these developments and reviewing procurement strategies is becoming increasingly important.
Energy markets are currently being pulled in opposite directions. On one side there are fears of supply disruption caused by conflict and attacks on key shipping routes. On the other, governments and producers are taking steps to maintain global supply and calm markets.
The result is a market that continues to behave very much like a tug of war.
For now, the UK remains relatively well positioned in terms of supply, but the global nature of energy markets means developments in the Middle East will continue to influence prices in the weeks ahead.
This article forms part of our ongoing series analysing how geopolitical events in the Middle East are impacting global energy markets and what that means for UK businesses.
