Drivers face petrol price rise as Middle East crisis deepens

petrol pump at a petrol station

Motorists are braced for a rise in fuel costs as the escalating crisis in the Middle East threatens to send oil prices close to $100 a barrel.

The RAC warned that petrol prices could hit £1.50 a litre for the first time in five months if Iran’s attack on Israel drives up the price of crude. Oil prices are already trading at six month highs but analysts said they are expected to rise on Monday after Iran sent a swarm of missiles and drones to Israel on Saturday night.

Bob McNally, a former energy adviser to the Bush administration who runs Rapidan Energy Group, warned of an “escalatory dynamic” with the market “complacent” about risks from Iran, and that the attack had been bigger than traders had expected.

“These two factors should lead to a strong open for crude oil prices this week,” he said.

Mr McNally said oil prices should rise by at least three to five dollars a barrel in the coming days and weeks.

Brent crude rose towards $92 a barrel on Friday, its highest level since October.

RAC fuel spokesman Simon Williams said: “If the price of oil was to reach $95 a barrel, we could see petrol at the pump go back up to £1.50 a litre, which would be bad news for hard-pressed drivers.”

A rise in the dollar caused by investors diverting their funds away from riskier assets would also push up petrol prices, since oil is priced in dollars.

Mr McNally said oil prices were most likely to be determined by how Israel responds to Iran’s strike. “If Israel does not respond before the open in Asia, the initial price response could be a bit more muted,” he said. “But the market has some more risk pricing to do.”

Giovanni Staunovo, a commodities analyst at UBS, said: “Oil prices might spike at the opening, as this is the first time Iran struck Israel from its territory. How long any bounce lasts will also depend on the Israeli response.”

The RAC said fuel prices could also come under pressure from retailers raising their own margins. Profit margins on petrol have fallen from 10.5p to 8p per litre this year under pressure from competition authorities but Mr Williams said this could rise again due to factors such as increasing staff costs.

“If the average retailer margin on unleaded was to go back up to 10p a litre, the £1.50 mark could be exceeded even at $90 a barrel.”

A litre of unleaded petrol costs on average 149.25p a litre, up from 140p at the start of the year, according to the RAC. It last cost over 150p a litre in November.

Rising petrol prices would threaten efforts to bring down inflation, a potential blow to Joe Biden’s re-election hopes in the US, where fuel costs are a key political issue. Capital Economics said in a note that tensions in the Middle East would “add to the reasons for the [Federal Reserve] to adopt a more cautious approach to rate cuts, but they won’t prevent it from cutting altogether”.

In nervous weekend trading, markets that were open on Sunday in the Middle East, including Saudi Arabia and Israel’s fell slightly. Bitcoin slumped on Saturday night after Israel said Iran had sent drones, before recovering some of its losses on Sunday after the attack was repelled.

Iran has gradually increased oil production in recent years, but its output could come under pressure if Western countries were to step up restrictions in response to Saturday night’s attack. Petrol prices typically take up to two weeks to feed in to higher prices at the forecourt, according to the RAC, reflecting the time it takes for wholesale crude to make its way to pumps.

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