Oil prices jump as US attacks Iran, calls for ceasefire and threatens UK SMEs

Hopes of an immediate reopening of the Strait of Hormuz are fading as Washington’s latest strikes leave UK SMEs counting the cost of alternative fuel and energy.

Oil prices fell again after the United States launched a new round of airstrikes on Iranian missile sites and ships that Washington says are laying mines in the Gulf, pushing an already fragile peace process over the edge and fading hopes of an imminent reopening of the Strait of Hormuz.

Brent crude, the international benchmark, was changing hands 3 percent higher at around $99.16 a barrel by mid-afternoon in London, although that still left it below Friday’s close of $103. The move reverses Monday’s sharp sell-off that saw Brent hit $97.76, its lowest level in more than two weeks, as traders piled on the prospect. that US-Iran tensions were finally imminent.

Captain Tim Hawkins, a spokesman for US Central Command, stressed that the latest action was very minor. The strikes, he said on Monday, were aimed at “protecting our troops while we exercise restraint during the ongoing ceasefire”. In the energy market, however, restraint is in the eye of the beholder. An Iranian negotiating team had just arrived in Doha to finalize the extension of the April ceasefire and the phased reopening of Hormuz when the Tomahawks flew.

Two weeks of progress can be made at once

For Britain’s small and medium-sized businesses, the timing could be worse. As Business Matters reported earlier this week, the ceasefire framework agreed in April has been quietly pushing Brent back into double digits and easing pressure on forward prices for the first time since February.

Marco Rubio, the US Secretary of State, was at pains on Tuesday to insist that a deal is still on the table. “The president has expressed his desire to do that,” he told reporters, before adding the now-familiar caveat: “He’s either going to make a good deal or he’s not going to make a deal.” President Trump himself described the talks as “going well”, while threatening that the outcome would be “an All or Nothing Deal”. Tehran has been keeping a low profile, with officials confirming that both sides have “reached a conclusion on most of the issues under discussion”, even if a final deal has yet to be reached.

The market reaction in Asia and Europe tells its own story. The Nikkei 225, which had rallied 2.9 percent on Monday to a record near 65,158.19 on hopes of a correction, fell 0.3 percent on Tuesday. China’s SSE Composite shed 0.6 percent. In London the FTSE 100 opened 0.7 percent stronger – which is a sign of the times, given that the UK and US exchanges are closed for a bank holiday on Monday and are now playing along with a rally that has lifted Germany’s Dax by 2 percent and France’s Cac 40 by 1.8 percent.

Why Hormuz is still relevant to the corner shop in Croydon

The Strait of Hormuz remains, in the words of cargo desks, the single most important area in the world. About a fifth of marine oil and liquefied natural gas passes through the 21-kilometer-wide channel between Iran and Oman, which has been effectively closed since late February. The International Energy Agency has described the resulting shift as the biggest supply shock in the history of the global oil market, with a further loss of Gulf supply now in the tens of barrels.

That is very important beyond the trading posts of Geneva and Singapore. For an owner-managed engineering firm in the West Midlands, a family-run transport operator in Felixstowe or an independent bakery in Glasgow, every dollar in a barrel of Brent costs diesel, gas station costs, packaging, and the cost of everything shipped. The Federation of Small Businesses has already warned that energy bills, business rates and rising employment costs are colliding to create what one chief executive described as a “slow squeeze”.

The fear in Westminster is that yesterday’s progress on inflation is about to be reversed. Brent has risen more than 40 per cent since the start of the year, and a further retreat back to $100, in Bank of England modelling, would push back a fall in consumer prices of more than 4 per cent – making any rate cut by the Bank this autumn clearly unlikely. As Business Matters puts it in its SME impact analysis, the UK GDP deduction from the long-term closure of Hormuz could reach £35 billion over two years.

Months, not weeks

The analyst community, equally, is skeptical that even a broad agreement would bring immediate relief. David Oxley, chief climate and commodity economist at Capital Economics, says that while oil prices may fall back “sharply” to a credible zone, a return to anything resembling normality is a matter of 2027 and not 2026.

“Oil prices will only go down when the fundamentals of the oil market improve materially, which is likely to reach 2027,” he said, pointing to the ongoing damage to Middle East production facilities and the tanker fleet that is, physically, in the wrong place. “At best, it can take weeks for ships to set up properly. At worst, a lack of shipping can be a stressful factor for months and delay production times.”

June Goh, an oil analyst at Sparta Commodities, made similar comments. “The underlying shortfall in the supply of 10 to 11 million barrels per day of crude oil is not going away anytime soon and will see markets draw down inventories until crude comes back online, which is months away,” he said.

There is also a strange political subtext. Any deal between Washington and Tehran in Doha would, by design, push the more serious question of Iran’s nuclear program into the second round of negotiations. According to a report by CNBC, US officials are clearly worried that Iran will use the breathing space gained by the ceasefire to drag its feet on the nuclear file – a concern that is strengthening the hawkish wing of Congress to seek greater approval before further sanctions relief.

What it means for British business

For SME owners trying to budget for the second half of the year, the message from this week’s whipsaw is uncomfortable but clear. The oil flow will remain low – but the journey will be tough, emotionally driven and highly sensitive to all the press releases coming out of Doha and all the drones in the Gulf.

That proves caution rather than negligence. A recent Business Matters report on SME cost pressures suggests that the firms that come out of this period in the strongest position are those that lock into fixed-price energy contracts where they can, stress-test cash flow against the $110 scenario, and resist the temptation to think that the worst is behind them.

In Doha, the negotiating teams will be there tomorrow. On the trading floors of London, traders will be watching the entire meltdown of the title ticker. And in social media and warehouses across the country, the slow, grinding question of how to pass another round of input inflation to already stretched customers will continue. As one Birmingham producer said to me this week: “We’ve been here before. We know how it ends. We just don’t know when.”