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The British pound is extremely vulnerable to a spike in natural gas prices following the closure of Qatari export terminals.

A significant vulnerability for sterling coming out of this Middle East conflict is the surge in natural gas prices to levels last seen in the wake of Russia's invasion of Ukraine.

Businesses, households and the Treasury desperately need Monday's surge to reverse.

Prices skyrocketed after Qatar - which accounted for about 18.8 % of all global LNG exports in 2024 - shut down liquefied natural gas production at the world’s largest export facility after it was targeted in an Iranian drone attack.

Analysts describe this as an unprecedented halt and European gas prices surged more than 50% in response.

Above: UK natural gas for delivery in April.

European benchmark gas futures jumped the most in nearly four years, after QatarEnergy confirmed Monday that output had been suspended. UK natural gas for April delivery rose to £121 / therm, the highest since December 2022.

Tankers had already largely stopped transiting the Strait of Hormuz, a critical artery for global fuel shipments.

For UK businesses and households, this energy event will inevitably be felt in the coming months via an unforeseen inflationary impulse. It severely constrains the Bank of England's ability to lower interest rates and stimulate economic growth.

The UK's public finances were precarious enough ahead of a renewed shock, and Chancellor Rachel Reeves will also be desperately hoping that the situation in the Middle East calms down or her borrowing and spending plans will come deteriorate markedly.

A key vulnerability to sterling in 2026 is another breakdown in investor confidence over Britain's ability to sustain current debt levels.

As Qatar comes offline, global competition for natural gas rises and natural gas from all sources is bid higher.

QatarEnergy's Ras Laffan plant supplies about a fifth of global LNG supply, which is why a prolonged closure represents the most significant shock to global energy prices since the Russian invasion of Ukraine.

"The price shock from the loss of Middle East LNG could be similar to 2022, after Russia’s invasion of Ukraine,” said Mike Fulwood, an analyst at the Oxford Institute for Energy Studies.

The economic shock of the war will be exacerbated Thursday when more than half of the world's largest maritime insurance networks will stop providing war-risk cover for vessels entering the Persian Gulf, according to Bloomberg.

Markets hope that the situation will soon settle and the pound has come off the day's lows as a result.

One consistent message we pick up in the mayhem of war coverage is that the U.S. wants Iran to come to the negotiating table, and we suspect President Donald Trump knows he will become very unpopular very fast in the event of another spike in inflation.

His problem is that his military did such a good job of eliminating the Iranian leadership that there's not much of a senior team to negotiate with at this point, meaning Iran might be rudderless for some time and will keep fighting as a de facto response.

For the pound and the UK economy, the longer this goes on, the worse the outlook becomes.