Market report: Oil prices rise as Iran and Israel escalate hostilities

LONDON, Capital Markets in Africa –  With the Israel-Iran conflict intensifying, there’s wariness at the start of the week as dangerous geopolitics stay front of mind. However, stronger data from China, indicating growing consumer confidence is helping to provide some optimism. There are worries that the attacks from Iran and Israel could ignite a wider conflict, destabilising the Middle East and affecting oil supplies. BP and Shell are among the gainers in early trade, off the back of higher crude prices. Gains in oil majors and defence contractors have helped to push the FTSE 100 onto a positive footing in early trade. 

Brent Crude has edged higher, as supply concerns take hold amid the escalation of hostilities in the Middle East. Oil prices jumped sharply at the end of last week, as missiles began to be fired. There intense focus on the Strait of Hormuz, described as an ‘oil artery’ in the region. Around a fifth of global oil supplies flow through this narrow channel and an escalation could disrupt distribution. Israel has already been targeting Iran’s energy facilities, including Iran’s South Pars gas field. Although gas prices have also edged up slightly, the biggest moves have been seen with crude prices which are up around 12% since hostilities erupted and could head higher if the Strait is targeted.  The worsening situation is set to be the focus of the G7 meeting of leaders of wealthy nations in Alberta, Canada.  While hopes that Trump will sign more deals seem to be keeping trade optimism a bit higher, many countries remain in a queue and the cost to the global economy is mounting.

China though is proving resilient, with the framework for a US trade deal agreement and efforts by authorities to stimulate demand in the economy bearing some fruit. Retail sales have surprised on the upside, rising 6.4% year-on-year in May, up from a 5.1% increase in April. Although industrial production figures eased off, there are still hopes that the sector will withstand pressures, given that China had already been forging new trading relationships elsewhere in the world, before the tariff turmoil. With Chinese consumers showing a little less caution, it’s lifted spirits for the luxury goods sector. China has been the powerhouse for European brands, and sentiment has risen around Burberry in early trade.

Investors are continuing to find shelter in gold amid high tensions on the world stage. With Israel and Iran in war mode, and tariff threats still hovering over nations, there’s been a diversification into safe-haven assets. Gold prices have edged down a little are still hovering around record highs, with the previous metal trading above $3,411 an ounce.

It’s a big week in terms of decisions on interest rates and the direction of monetary policy. The Federal Reserve is expected to keep rates on hold this week but comments from chair Jerome Powell will be closely watched for future direction of policy. While the last inflation reading came in a little cooler than expected, there’s still significant uncertainty around about the direction of price rises. Bank of England policymakers are expected to press pause on rate cuts this week.  Even though the labour market is weakening, leading to expectations of lower pressure on wage growth, the potential impact of higher energy costs will be monitored closely. Financial markets had been pricing in two interest rate cuts by the end of the year. Although the bets on this have receded a little, it’s still looking highly likely. 

There will also be keen eyes trained on the UK government’s infrastructure plans, which are due to be revealed in more detail this week. The 10-year strategy, worth £725 billion, is the backbone of the Starmer administration’s plan to kickstart growth. There’s likely to be wary monitoring going on among bond investors. While the capital spending initiatives have been broadly accepted, proof will be in the delivery of the projects. Planning rules are already in the process of being shaken up, but there’s likely to be changes in procurement afoot to ensure that the big spending commitments boost British firms through the supply chain and increase the prospects for UK workers. The expectation is for more development corporations to be set up to drive forward projects, and co-ordinate funding streams.

Susannah Streeter, head of money and markets, Hargreaves Lansdown