Market News

For years, global oil prices existed in a kind of harmony, rising and falling in step with each other as the ebbs and flows of supply and demand moved them in near lockstep.

But now the US and Israeli assault on Iran and its closure of the Strait of Hormuz has changed all that.

In recent days, oil prices have splintered sharply – leading markets into uncharted waters and posing risks to Europe.

The $160-a-barrel price on offer for Middle Eastern crude oil is a sign of a market out of kilter and gives a frightening glimpse of what’s coming to Britain, say experts.

The price of Dubai crude oil is one of the three most important global oil price benchmarks, alongside Brent and West Texas Intermediate (WTI) – and normally they all sit fairly close together.

Before the conflict all three were hovering around $70 a barrel but each one is trading at a different price, with US prices much cheaper than European and Middle Eastern barrel.

It’s an imbalance that has rarely been seen in global energy markets, with many seasoned energy watchers surprised by the different trajectories.

“Global energy markets are in uncharted waters,” says Tom Kloza, a veteran oil analyst.

“I don’t think anybody was prepared for this. It is absolutely extraordinary. There is no real playbook for how to deal with it and everybody is making things up as they go along.”

Brent crude, typically seen as the benchmark for UK and European prices, has risen sharply to around $111 a barrel.

But WTI – the benchmark for US oil prices – is currently trading sharply lower at $98. Normally, the gap is only around $3.

Both are alarming in their own way. But is it the price of Dubai oil, shipments that can be rapidly delivered, that is setting off the most alarm bells. This has soared to $160 a barrel and is rising fast.

It’s probably the biggest divergence in prices between the Middle East and Western supplies for years. So what’s going on? And what does it mean for our own energy bills?

Goldman Sachs and other analysts suggest the underlying cause for the spike in the Dubai price is that refineries in the Middle East and Asia are simply desperate for more supplies.

Many of these refineries have been built specifically to process Middle Eastern crude – meaning they are unable to use Brent or WTI oil in their production.

That may sound like less of a problem for Britain. Not so, says Greg Newman, the chief executive of Onyx Capital, London-based oil traders.

“Oil gets moved around the world according to where the higher prices are and these prices will be coming to Europe too,” he says.

“The kind of numbers seen for Middle Eastern crude are what we can expect for European prices soon.”

Newman says the impact of higher energy prices will soon spread from the energy sector into every corner of the economy – driving up prices for food and forcing up inflation and interest rates.

Both he and Goldman Sachs warn that an extended conflict could see the US forced to restrict its own exports, a move that would prompt another surge in prices.