Oil prices are rising as tensions increase in the Middle East

Oil prices rose sharply yesterday as Iran’s missile attack on Israel raised fears of a full-scale conflict in the Middle East.

As the world braced for Israel and its allies to retaliate against Tehran, Brent crude rose another 2 percent to a high of $76.14 a barrel.

That cut gains since oil prices were trading below $70 before Tuesday’s attack to nearly 9 percent, raising new concerns about the inflation outlook.

Analysts warned that oil could now breach the $80 mark. Fawad Razaqzada of City Index said: “Crude oil could rise by $5 in the coming days if we see further escalation.”

The rally came as a report from the Bank of England showed that banks and other financial firms are increasingly concerned about global political events – which represent the biggest perceived risk to stability.

The Bank also warned that markets remain ‘prone to a sharp correction’ after the summer sell-off.

Meanwhile, oil and defense stocks made further gains following the latest events in the Middle East, with Shell, BP and BAE Systems rising strongly.

Fears of weakening demand from China and signs that supply remains ample pushed oil below $70 a barrel before the escalation of tensions, down from almost $90 in July.

That helped drive down petrol prices for British motorists to their lowest level in three years and brought down inflation. But fears that a regional war could engulf Iran and other oil-producing countries threaten to halt this trend.

Analysts said much will depend on how Israel responds. “The key message from geopolitics is that inflation has not gone away,” said Trevor Greetham, head of multi-asset at Royal London Asset Management.

David Oxley, chief climate and commodities economist at Capital Economics, said: ‘Until the geopolitical situation in the Middle East de-escalates, oil prices will clearly remain at risk of rising further.’

But for the year ahead, the backdrop of ‘sluggish demand and increased supply in the broader market’ meant that risks were ‘demonstrably skewed to the downside’.

Global stock markets came under pressure yesterday as safe havens such as gold and government bonds posted gains.

Germany’s Dax index fell, but the FTSE 100 finished 0.2 percent higher and New York stock markets were little changed.

It came as the Bank of England’s financial policy committee, which watches for threats to the financial system, noted the risks of a market collapse at a time when global stock prices are at record levels. The report states that the ‘stretched valuations’ do not take into account the risks to global growth.

“Markets therefore remained susceptible to a sharp correction, with investors sensitive to developments in a still challenging global risk environment,” the report said.

And it raised the possibility that the sharp global sell-off in August, when investors got jitters over US jobs data and tepid tech results, could have gone further.

Other risks could arise from the US bond market, where investors are concerned about rising debt levels following the presidential election next month.

Hedge funds have taken on a record $1 trillion (£750 billion) of short positions in US government bond futures – a massive bet on US government bonds.

On the other side are asset managers who build ‘long’ positions in the assets.

Unwinding these positions could “amplify the transmission of future stress,” the Bank said.

A Bank survey of financial firms found that the proportion of those concerned about ‘geopolitical risks’ was high. About 93 percent of those surveyed said this was the biggest source of risk to the UK financial system.