Energy prices surged on Tuesday, sending stocks tumbling and the dollar rising as investors worried about inflation and the inability of central banks to help with interest rate cuts.

World oil prices soared around nine percent and European natural gas prices rocketed for a second day running as the war disrupted Middle East exports.

Brent North Sea crude, the international benchmark, topped $85 a barrel for the first time since July 2024.

The US and Israeli attacks on Iran and its retaliation across the region have upended regional energy flows, with the crucial Strait of Hormuz — through which about a fifth of global oil transits — effectively closed off.

The war has also fuelled fears of a fresh energy crisis that could ramp up inflation.

“The higher energy costs are fueling inflation concerns, pushing out rate cut expectations for some and increasing rate hike possibilities for others, while also raising earnings concerns that stem from higher operating costs and a potential slowdown in consumer spending,” said Briefing.com analyst Patrick O’Hare.

Wall Street’s main indices opened sharply lower, with the tech-heavy Nasdaq Composite dropping two percent.

European markets were hit even harder with losses of three per cent and more.

“European markets are being hit hard as the full inflationary impact of the war in Iran truly comes home to roost,” said Joshua Mahony, chief market analyst at Scope Markets.

Data showed an unexpected rise in eurozone core inflation, adding to concerns.

Forex.com analyst Fawad Razaqzada said that the inflation concerns have diminished chances of an interest rate cut in the eurozone.

“That’s why we have seen a huge drop in stock markets today with even gold also unable to find much love,” he said.

The European Central Bank’s chief economist Philip Lane said in an interview with the Financial Times published on Tuesday that a lengthy Middle East conflict and sustained drop in energy supplies could trigger a “spike” in eurozone inflation and hit regional growth.

Threat to energy supplies

New strikes were reported Tuesday across the Middle East, including Israeli bombardment on Lebanon and a drone attack on the US embassy in Saudi Arabia’s capital Riyadh.

The conflict started with US and Israeli strikes on Iran over the weekend, which sparked retaliatory Iranian attacks and showed no sign of abating as it entered its fourth day.

Iran has unleashed missiles and drones across the Middle East, including at Saudi Arabia, Qatar and Dubai, while threatening explicitly to drive up global energy costs.

A general in Iran’s Revolutionary Guards threatened to “burn any ship” seeking to navigate the Strait of Hormuz.

The Dutch TTF natural gas contract, considered the European benchmark, shot up more than 40 pc to over 60 euros on Tuesday — its highest level since January 2023, in the wake of the price spike triggered by the Ukraine war.

European natural gas prices had surged 50 pc on Monday after Qatar’s state-run energy firm said it had halted liquefied natural gas production due to strikes.

The rise in energy costs could give most central bankers a headache as they look to bring down inflation while also cutting interest rates to support their economies.

“A spike in energy prices creates a dilemma for central banks,” said Rodrigo Catril at National Australia Bank.

“Stagflation makes central banks very uncomfortable, a longer-lasting energy shock is inflationary and at the same time it weakens growth,” he added, referring to a high inflation and low growth environment.

The dollar, seen as a safer bet in times of economic unrest, extended gains against major rivals.

Asian equities extended Monday’s losses, with Seoul diving more than seven pc as investors returned from a long weekend.

Tokyo shed more than three pc while Hong Kong, Shanghai, Sydney, Wellington, Taipei and Jakarta were also sharply lower.