City analysts and policymakers are on edge as a possible attack by Iran on the Strait of Hormuz could send oil prices spiralling.
Investors fear a new inflationary shock could hit major economies including the UK as a result of full-blown war between the US and Iran.
Many had pinned hopes on nuclear programme negotiations between the US and Iran taking place in Switzerland earlier this week but now all-out war is possible after strikes were launched by President Trump and Israel’s Prime Minister Netanyahu across at least five Iranian cities.
Iran hit back at Israel with retaliatory strikes, with a state of emergency being called in Israel.
A UK government spokesperson urged that no “further escalation into a wider regional conflict”.
Former foreign secretary David Lammy previously warned that blocking the Strait of Hormuz would be a “catastrophic mistake” when the US and Iran engaged in a 12-day war last June.
Research has indicated that oil prices could jump to $100 per barrel should Iran respond to airstrikes on Saturday morning with attacks on the strait, which is essential for around a fifth of global oil and gas trade.
Capital Economics’ chief emerging markets economist William Jackson has suggested that such a rise in the price of oil from the current level of $73 on Brent crude oil could add up to 0.7 percentage points to global inflation.
Analysis also suggested that a prolonged war in the region could also send oil prices higher.
“A limited set of strikes could plausibly send oil towards $80 per barrel, while a longer conflict that causes disruptions to supply could send prices much higher – with a material effect on global inflation,” Jackson said.
“Our estimates suggest that the political risk premium baked into the oil price has already risen substantially amid the US military build-up in the region.
“That said, even if strikes remain limited, we think Brent crude oil prices might rise.”
Investor eyes turn to oil and gold
Investors will also be on high alert as markets re-open on Monday, with eyes set to be on movements in the gold prices, major FTSE stocks and energy prices.
Susannah Streeter, chief investment strategist for the Wealth Club, suggested that some assets could prove to be a bulwark against volatility in markets.
“For investors owning quality companies over the long term, big bumps in the road are part of the journey,” Streeter said.
“Assets such as gold and more defensive stocks including utilities, healthcare firms, companies selling consumer staples and those with reliable, high‑yielding dividends, tend to be more resilient in eras of unpredictability.’’
