Europe’s sovereign bonds are facing “a perfect storm” after new inflation fears sparked by the Iran conflict forced the region’s central banks to signal a new course for interest rates on Thursday, sending yields soaring.

The Bank of England left interest rates unchanged at 3.75% on Thursday, with the European Central Bank also holding steady on borrowing costs, as the economic impact of soaring energy costs hangs over rate-setters.

Yields on 10-Year Gilts, the benchmark for U.K. government debt, rose more than 13 basis points to 4.871% — a new 52-week high on Thursday — before easing.  The yield on 2-Year Gilts, which are typically more sensitive to rates decisions, immediately surged 39 basis points in the biggest rise since former Prime Minister Liz Truss’s ‘Mini Budget’ in September 2022.  They were last seen 27 basis points higher, at 4.378%.

French, German and Italian bonds saw less severe selling pressure, but yields rose across the continent.

Market strategists say the BoE’s move — a unanimous call by its nine-member monetary policy committee — effectively ends hopes of any further rate cuts this year and dramatically shifts the policy outlook from where it was just two weeks ago.

Ed Hutchings, head of rates at Aviva Investors, said that the chances of a rate hike from the BoE over the coming months have increased.

“With this in mind, from an asset allocation perspective, we could start to see investors tactically adding overweights in gilts in the short-term, with at least one hike expected later in the year as of today,” Hutchings said.

Matthew Amis, investment director, rates management at Aberdeen Investments, described the unfolding environment as a “perfect storm” for Europe’s sovereign bond markets.

“Energy prices spiking higher and the Bank of England opening the door to potential rate hikes have seen gilts spike higher. German bunds are the relative calm in this storm but are still pushing 3% due to similar inflation fears,” Amis told CNBC via email.

“Gilts and bunds are pricing in a much longer conflict than other markets, focusing on the inflation surge with markets yet to focus on the potential negative impact on growth.”

Meanwhile, the ECB’s next move will now likely be a hike, according to Simon Dangoor, deputy chief investment officer of fixed income and head of fixed income macro strategies at Goldman Sachs Asset Management.

“The governing council is clearly sensitive to upside inflation risks, but will likely look to assess potential second-round effects before making a move,” Dangoor said. “A hike is therefore possible later in 2026; however, the ECB stands ready to act sooner if the situation deteriorates.”

U.S. President Donald Trump on Wednesday warned that if Iran continued targeting Qatar’s energy facilities, America would “massively blow up the entirety of the South Pars Gas Field.”

Tehran has attacked a key energy facility in Qatar after Israel bombed the South Pars Gas in Iran, signaling a sharp escalation in the conflict and sending energy prices soaring.

Qatar said Wednesday that Iranian missiles caused “extensive damage” at Ras Laffan Industrial City, home to the largest liquefied natural gas, or LNG, export facility in the world.

Trump also denied any prior knowledge of Israel attacking South Pars, pushing back against reports that the strike was coordinated with and approved by his administration.

In a social media post Wednesday night stateside, Trump said that “the United States knew nothing about this particular attack, and the country of Qatar was in no way, shape, or form, involved with it, nor did it have any idea that it was going to happen.”

Trump also urged Israel to end attacks on the South Pars gas field, unless Iran “unwisely” decides to attack Qatar. In that case, the U.S. will “massively blow up the entirety of the South Pars Gas Field at an amount of strength and power that Iran has never seen or witnessed before.”

The attack on South Pars — the world’s largest natural gas reserve, shared between Iran and Qatar — marked the first time Israel has targeted Iranian natural gas production infrastructure since the conflict began on Feb. 28.

Iran has fired ballistic missiles at Qatar’s Ras Laffan Industrial City, with ​QatarEnergy saying the attack had caused “extensive damage” warranting deployment of emergency response teams to contain fires at the site. No casualties were reported.

Separately, Reuters reported Thursday that the U.S. government was considering deploying thousands of U.S. forces to the Middle East, raising the prospect of further escalation.

As tensions spiral, world leaders are scrambling to contain the Middle East conflict amid fears of deepening the turmoil in global energy markets.

German Foreign Minister Johann Wadephul on Wednesday warned of a “crisis of the gravest order” if global supply chains continued to be disrupted, calling for a path toward de-escalation and a cessation of hostilities once U.S. and Israeli military objectives are achieved, according to local media reports.

The United Arab Emirates called the targeting of energy facilities linked to the South Pars field in Iran a “serious escalation,” posing “a direct threat to global energy security” with severe environmental repercussions.

The UAE Ministry of Foreign Affairs also called Iran’s targeting of its Habshan gas facility and Bab field a “terrorist attack,” risking a “dangerous escalation.”

Qatar’s foreign ministry spokesperson Majed al-Ansari described the Israeli strike on South Pars as “a dangerous and irresponsible step” amid escalating regional tensions.

The Gulf nation has declared Iranian military and security attachés and their staff at the Iranian embassy in Doha “persona non grata,” ordering them to leave the country within 24 hours.

Saudi Arabia’s Foreign Minister Prince Faisal bin Farhan Al Saud also appeared to toughen the tone, reportedly saying that “what little trust there was before with Iran has completely been shattered.” Both political and non-political responses to Iran remain on the table, he added.

Iran’s Islamic Revolutionary Guard Corps on Wednesday threatened to escalate hostilities by targeting oil and gas facilities in Saudi Arabia, the UAE, and Qatar.

In a post on X, Iran’s President Masoud Pezeshkian condemned the strikes on Iran’s energy infrastructure, saying that they “could have uncontrollable consequences, the scope of which could engulf the entire world.”

The attacks on Middle East energy production facilities have further deepened supply disruption triggered by the conflict. Brent crude May futures rose 4% to $111.77 a barrel as of 10:25 p.m. ET , while U.S. West Texas Intermediate futures for April climbed over 1.3% to $97.56 per barrel.

Oil tanker traffic through the Strait of Hormuz — a vital chokepoint for one-fifth of global oil supply and a significant share of LNG exports — has plunged since the war began, with the waterway effectively closed to most commercial shipping.

Denmark’s energy minister urged citizens of the Scandinavian country to cut back on energy use and ditch cars as the price of oil continues to skyrocket amid the Middle East conflict.

Lars Aagaard, Denmark’s minister for climate, energy, and utilities, said Wednesday that the ongoing war between the U.S. and Iran has driven the country to lean on its oil reserves in light of “towering oil prices” with no end to the conflict in sight.

“What the Danes should please, please, please do is that if there is any energy consumption that you can do without, if it is not strictly necessary to drive the car, then don’t do it,” he said in an interview with local broadcaster DR, translated by Google.

If Denmark saves energy in the near future, there will be two positive effects that can be felt both by citizens and the government, he said.

“Firstly, it can be felt in the private wallet, and secondly, it can help stretch our reserves so that they last longer,” Aagaard said.

Similar warnings have been issued across countries worldwide. In the U.K., motoring groups such as the AA have called on drivers to cut “non-essential journeys,” and change their driving style to conserve fuel.

Vietnam’s Ministry for Industry and Trade encouraged businesses to adopt remote working arrangements and reduce travel and transport demand to ensure national energy security.

Meanwhile, the Philippine government implemented a temporary four-day workweek in certain executive branches to conserve energy and reduce fuel use.

Concerns over oil prices have remained elevated this week, as oil shipments through the Strait of Hormuz ground to a halt due to the threat of Iranian attacks on vessels. A potential inflation spike could follow if the passage remains closed, and threatens to raise the cost of living, from petrol to groceries.

Oil prices jumped over 8% to more than $100 per barrel earlier on Thursday. The West Texas Intermediate was last up 4.6% to $91 per barrel, while global benchmark Brent was trading nearly 5% higher at $96.

To assuage these fears, the International Energy Agency on Wednesday agreed to release 400 million barrels of oil to address the supply disruption triggered by the Iran war.

The IEA, which represents 32 member countries across Europe, North America, and northeast Asia, said the reserves would be released over a specific time frame, depending on the needs of its member countries.

Meanwhile, the U.S announced that it would release 172 million barrels from its Strategic Petroleum Reserve, with shipments expected to begin next week and take roughly 120 days to complete.

Three more foreign ships were struck in the Persian Gulf overnight, authorities said, as attacks intensify on vessels sailing through or near the strategically vital Strait of Hormuz.

The latest incidents come after three separate vessels sustained damage in Gulf waters on Wednesday and as Iran warns oil prices could climb to $200 a barrel.

A container ship was struck by an unknown projectile about 35 nautical miles north of Jebel Ali, a major port city near Dubai in the United Arab Emirates, the United Kingdom Maritime Trade Operations (UKMTO) center said on Thursday. The incident caused a small fire onboard, and all crew were reported to be safe.

Earlier, two foreign oil tankers were left ablaze in Iraqi waters after having been struck near the port Umm Qasr, near the city of Basra.

At least one person was killed in the attack, according to multiple media reports, citing Iraqi port officials, and 38 crew members were rescued from the ships. Iraq’s General Company for Ports was not immediately available to comment when contacted by CNBC.

Shipping traffic through the Strait of Hormuz has virtually ground to a halt since the U.S. and Israel launched airstrikes on Iran on Feb. 28. Iran has retaliated by targeting ships trying to pass through the strait, with several incidents reported in recent days.

The narrow waterway is a key maritime corridor that connects the Persian Gulf and the Gulf of Oman. Roughly 20% of global oil and gas typically passes through it.

Attacks on commercial ships in the Gulf have ratcheted up fears of a prolonged economic shock.

“Get ready for oil to be $200 a barrel, because the oil price depends on regional security, which you have destabilised,” Ebrahim Zolfaqari, spokesperson for Iran’s military command, said Wednesday, according to Reuters.

Crude prices were sharply higher on Thursday morning, as traders closely monitored supply risks and appeared to shrug off the International Energy Agency’s push to release a record 400 million barrels of oil.

International benchmark Brent crude futures with May delivery traded 5.7% higher at $97.16 per barrel, while U.S. West Texas Intermediate futures with April delivery rose 5.3% at $91.88.

The IEA on Wednesday did not set out a timeline for when the stocks would hit the market. It said that the reserves would be released over a time frame that is appropriate to the circumstances of each of its 32 member countries.

The energy price shock that followed Russia’s invasion of Ukraine four years ago is fresh in the minds of European policymakers as the conflict in Iran once again drives oil and gas prices higher. Experts, however, think this time could be different.

Fears of a full-blown energy crisis on that scale — which saw oil top more than $120 a barrel by June 2022, gas prices soar, household energy bills rise, and eurozone inflation hit a record 9% — may yet be overblown, according to investment strategists.

Brent crude, the global oil benchmark, has retreated from the near-$120 per barrel seen earlier in the week, as the International Energy Agency agreed on Wednesday to release a record 400 million barrels of oil from its emergency reserves. European natural gas prices, as measured by the Dutch TTF futures benchmark, also pulled back from a three-year high of 63.77 euros per megawatt-hour and were last seen under 50 euros per MWh on Wednesday.

James Smith, developed markets economist focusing on the U.K. at ING, said that while the initial energy price reaction appears “eerily familiar” to the start of the Ukraine invasion, the global economic picture looks very different from the 2022 shock.

“The 2022 energy crisis landed on a global economy that was ripe for inflation to take off. Supply chains were fractured, job markets tight, and fiscal policy was fueling the fire. All of that, to varying degrees, is less true today,” Smith said in a note.

The impact on Europe’s inflation trajectory hinges on the duration of the conflict, analysts say.

The ongoing shutdown of Qatari production of liquefied natural gas (LNG) — which accounts for almost a fifth of global LNG supply — and attacks on vessels in and near the critical Strait of Hormuz could disrupt oil and gas stocks in Europe for longer.

A prolonged surge in natural gas prices triggered by the ongoing war in the Middle East risks denting European growth and hitting some Asian economies hard, analysts have warned.

Global gas prices have soared this week amid fears of a lengthy disruption to energy flows through the Strait of Hormuz — a key shipping route running between Oman and Iran that handles about one-fifth of global LNG trade — as the Iran conflict escalates.

Dutch Title Transfer Facility (TTF) futures, Europe’s benchmark gas contract, rose 35% on Tuesday to more than 60 euros ($69.64) per megawatt-hour. On the week, prices are around 76% higher.

The Northeast Asia LNG benchmark, the Japan-Korea-Marker (JKM), which captures deliveries to Japan, Korea, China and Taiwan, reached a one-year high, and was last seen around 43 euros per megawatt-hour. U.K. natural gas was also sharply higher.

Qatar, one of the world’s largest LNG producers, halted production on Monday following Iranian drone strikes at Ras Laffan Industrial City and Mesaieed Industrial City. Goldman Sachs estimated the pause will reduce near-term global LNG supply by about 19%.

A senior Iranian Revolutionary Guard official later said the country had closed the Strait of Hormuz to all ships, and warned that any vessel attempting to pass through the channel would be attacked. The U.S., however, said the route remained open, according to a Fox News report.

Europe and much of Asia are more heavily exposed to potential gas price shocks than the U.S., which benefits from both domestic shale and LNG production.

Around 25% of Europe’s total gas supply is LNG, according to Chris Wheaton, oil and gas analyst at Stifel. With roughly 20% of global LNG production sitting behind the Strait, a prolonged disruption could trigger a supply squeeze comparable to the 2022 shock following Russia’s invasion of Ukraine, he said in a note.

“We are much more concerned about European gas prices than we are about oil prices,” Wheaton said.

Shares of Norwegian energy giant Equinor, one of Europe’s largest natural gas suppliers, hit a 52-week high on Tuesday, adding more than 2%, after closing the previous session up more than 8%.

British oil giant BP on Tuesday posted fourth-quarter profit in line with expectations and suspended share buybacks, seeking to shore up its balance sheet as lower crude prices take their toll.

The London-listed energy firm reported underlying replacement cost profit, used as a proxy for net profit, of $1.54 billion for the final three months of 2025. That matched analyst expectations of $1.54 billion, according to an LSEG-compiled consensus.

BP’s full-year 2025 net profit came in at $7.49 billion, missing analyst expectations of $7.58 billion. That’s down from nearly $9 billion in 2024.

BP said the board decided to suspend the share buyback and fully allocate excess cash “to accelerate strengthening” of its balance sheet. The firm’s previous buyback was $750 million and was announced alongside third-quarter results in November.

For the fourth quarter, the company announced a dividend per ordinary share of 8.320 cents.

“2025 was a year of strong underlying financial results, strong operational performance, and meaningful strategic progress,” Carol Howle, BP interim CEO, said in a statement.

“We have made progress against our four primary targets – growing cash flow and returns, reducing costs, and strengthening the balance sheet – but know there is more work to be done, and we are clear on the urgency to deliver,” she added.

Woodside Energy boss Meg O’Neill is scheduled to take the reins at BP on April 1, following Murray Auchincloss’ decision to step down late last year.

Shares of BP fell 5.4% during morning deals, slipping toward the bottom of the pan-European Stoxx 600 index.

Some other earnings highlights included:

• BP’s fourth-quarter net debt came in at $22.18 billion, down from around $23 billion in the same period last year.
• Fourth-quarter operating cash flow came in at $7.6 billion, up from $7.43 billion a year ago.
• BP set its 2026 capital expenditure budget at $13 billion to $13.5 billion, reflecting the lower end of its guidance range.

The results come at a tough time for Europe’s oil and gas sector.

Oil prices notched their biggest annual loss since the Covid-19 pandemic last year, partly due to oversupply concerns, ratcheting up the pressure on Big Oil’s commitment to shareholder returns.

BP’s industry rivals Equinor and Shell both reported weaker quarterly earnings last week, citing lower crude prices, among other factors.

Equinor announced it would reduce share buybacks to $1.5 billion this year, down from $5 billion last year, while also trimming investments in its renewables and low-emission energy projects.

Shell, for its part, kept its buybacks steady at $3.5 billion, a move that marked the firm’s 17th consecutive quarter of $3 billion or more in buybacks.