Markets reacted with relief this week after Donald Trump signed a draft peace deal with Iran that promised to reopen oil and gas flows through the Gulf, according to the Guardian. The deal raises hopes that the strait of Hormuz, a critical global trade route, could return to normal commercial traffic. However, as the Guardian notes, there are already signs the truce could unravel, with peace talks in Switzerland abruptly called off on Friday.
Oil and petrol prices begin to fall
The international oil price has dropped to below $80 a barrel, down from highs above $126 a barrel at the peak of the crisis, when Iran's de facto blockade on the strait of Hormuz upended global energy markets, the Guardian reports.
Petrol prices at UK forecourts have already begun to reflect those falls. According to the AA motoring group, the price of a litre of petrol fell by 4.6p, from 159.7p on 28 May to 155.1p this week. Diesel dropped by 9.3p over the same period, from 184.4p to 175.1p a litre. The AA credited the government's Fuel Finder price comparison scheme, launched in February, as a factor in the speed of reductions.
However, the AA cautioned that disruption to Gulf supply chains is expected to keep pump prices relatively high for a while. Luke Bosdet of the AA noted that even with recent falls, road fuel remains very expensive by historic standards, before the Covid-19 pandemic, the Ukraine crisis and the Iran war, the highest price British motorists had paid was 142.5p a litre.
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Energy bills still rising this summer
Despite falling wholesale prices, households in England, Scotland and Wales are still facing the steepest summer rise in energy rates in four years. Under the government's energy price cap, gas and electricity costs will climb by 13% for the July to September period, reaching the equivalent of £1,862 for a typical household's yearly usage, up from £1,641 in the April to June quarter, the Guardian reports.
The July cap was set based on market prices between 18 February and 18 May, when the Middle East conflict was at its height. Energy regulator Ofgem's final price cap of the year will be calculated on trading between 19 May and 18 August, a period during which wholesale gas costs have begun to ease. As a result, the Guardian reports that the amount charged per unit of energy during winter is likely to fall, though bills are expected to remain above pre-crisis levels. Europe's gas prices have also fallen, from more than €61 per megawatt-hour in the first month of the conflict to between €40 and €42/MWh this week.
Grocery bills
On food prices, Ken Murphy, chief executive of Tesco, told the Guardian this week that he did not expect grocery inflation to reach the 9% levels suggested by some industry bodies in the early days of the Iran conflict, particularly given that petrol pump prices were, in his words, "falling as we speak." Murphy also noted that while consumer confidence remained low due to fears over rising prices, this had not yet translated into significant changes in shopping behaviour.
Mortgage market outlook shifts
The conflict caused significant turbulence in the mortgage market. Before the fighting began, economists had anticipated two interest rate cuts this year, but those expectations were replaced by predictions of rate rises amid fears that high oil prices would stoke inflation, the Guardian explains.
The Bank of England held the base rate at 3.75% on Thursday, and market expectations shifted this week to suggest a rise is more likely in November than September. Mortgage specialist Lorna Hopes of financial advisers Smith & Pinching told the Guardian that mortgage swap rates, which determine how lenders price fixed-rate loans, now point to no more than one base rate rise in the second half of 2026, compared with predictions of at least two rises just weeks ago. High street lenders including Nationwide and Barclays have cut mortgage rates in recent days, though rates remain higher than pre-war levels.
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