Iranian Tanker Seizure Triggers Sharp Rise in Oil Prices

Oil prices increased following Iran’s seizure of a tanker off the coast of Oman. The oil tanker, en route to Turkey, was redirected to an Iranian port by armed men. The price of Brent crude oil rose over 2 percent, reaching $78.40 per barrel after the incident.

The UK government has modeled scenarios projecting potential economic shrinkage due to disruption in the Red Sea. The Treasury has considered a potential $10 per barrel increase in international crude oil prices and a 25 percent rise in natural gas prices. Europe, especially reliant on Gulf and Straits of Hormuz gas exports, may be impacted.

The seizure, reportedly in retaliation for the US hijacking the same vessel last year, raises concerns about escalating Middle East conflicts affecting UK fuel prices. Higher oil prices can lead to increased pump prices and inflation.

Although UK inflation is currently 3.9 percent, the average fuel prices have slightly decreased. The recent incident appears separate from Red Sea attacks by Houthi rebels in Yemen.

While the reaction in the oil market to these attacks and the Israel-Hamas conflict has been relatively muted, the risk of oil supply disruption has decreased. Demand has dropped due to EU and US economic slowdowns and limited growth in China.

Strong oil production in the US, Brazil, and Guyana has alleviated concerns about Middle East supply disruptions. However, a further escalation in Middle East tensions could lead to more significant price increases, according to Caroline Bain, Chief Commodities Economist at Capital Economics.