Oil hits a six-month high as the Strait of Hormuz stays blocked

What happened

Brent crude, the global benchmark, settled at $116.72 a barrel on 23 October, its highest in six months and its third weekly gain in a row. A month earlier it was about $100; a year earlier, about $66. The US benchmark, WTI, closed just above $103.

Prices rose on fears that the conflict in the Middle East is widening, including attacks near the Red Sea. The Strait of Hormuz, the narrow route out of the Gulf that carries much of Asia’s oil, has been effectively blocked.

How we got here

Brent was near $70 in February. It spiked to about $126 at the end of April as fighting involving Iran escalated, then fell back to below $74 in late June, when tankers began moving through Hormuz again and the US and Iran held talks. Since then it has climbed back steadily.

Where it sits in the chain

This is an external shock, feeding straight into link 1: inflation. The first effects are already visible. In the euro area, the US and the UK, headline inflation is between 0.7 and 1.3 points above core inflation, which leaves out energy and food. Most of that gap is energy.

The harder question is what central banks do next. An oil shock is a supply shock: it pushes prices up while slowing growth. Raising rates fights the first problem but worsens the second. Central banks will watch core inflation and wages for signs the rise is spreading.

What to watch

• Shipping through Hormuz and the Red Sea. Any reopening would likely bring prices down quickly, as it did in June.
• The Fed on 28 October and the ECB on 29 October: whether they describe oil as a passing shock or a lasting risk.
• Currencies of big oil importers, such as the yen, the rupee and the euro.