Oil prices are back at levels last seen in January thanks to escalating tensions between Iran and Israel. This is an unpredictable and fast-moving situation which could have implications for the performance of the FTSE 100, inflation and much more besides.

Prior to the exchange of missiles between the two countries, oil was trading at multi-year lows thanks to concerns over global demand as tariffs threaten economic growth and amid rising production from producers’ cartel OPEC+.

These factors largely remain in place, so an easing of tensions would likely put oil on the back foot. As evidence of this truth, speculation president Donald Trump might seek to broker a ceasefire as he left a G7 meeting early on 16 June saw crude slip back before denials from the White House sent it higher again.

However, should there be a direct impact on Iran’s two million barrels of oil per day of oil and fuel exports or, more seriously, an impact on the Strait of Hormuz through which around 20% of global supplies of oil and liquefied natural gas pass, then energy prices could move yet higher. This would have a significant impact on inflation.

Fundamentally, a high oil price acts as a tax on growth through its impact on economic activity as consumers and businesses bear the financial costs. There have already been warnings from UK motoring organisations of a higher price at the pump as a result of higher wholesale energy prices.

Shore Capital analyst James Hosie says: ‘A more benign outcome for energy markets would include other OPEC+ members (notably Saudi Arabia) raising oil production to offset any disruption to Iranian exports, and non-OPEC production (notably US shale) responding to price signals, if necessary. Such an outcome could then lead to oil markets reverting to concerns about weaker demand growth and the need to accommodate additional OPEC+ volumes.’

Another offshoot of an oil price rally could be a stock market revival for oil and gas companies.

Investment bank Berenberg comments: ‘The global energy sector has progressively de-rated relative to the global equity market over the last two years alongside falling oil prices. This means that energy is back to its lowest valuation levels. This valuation support has often been a good time to raise exposure to the sector.’ 

Oil majors BP (BP.) and Shell (SHEL) have a combined weighting of around 10% in the FTSE 100 so the index may be somewhat sheltered from wider market volatility if oil prices were to spike even higher.

‹ Previous2025-06-19Next ›