FTSE 100 slides 0.6% as oil tops $86 on renewed Iran conflict

Renewed US-Iran hostilities sent Brent crude above $86 a barrel and pushed London's FTSE 100 lower as energy gains failed to offset risk-off positioning.

London's FTSE 100 fell 0.6% to 10,431.63 on Tuesday as escalating US-Iran hostilities drove Brent crude 4.1% higher to $86.73 a barrel, with losses in financial and travel stocks outweighing energy sector gains.

"Markets seem to be pricing in a resumption of negotiations given the lack of appetite for an extended standoff, but with oil stockpiles not fully rebuilt this is a risky view to take," said Chris Beauchamp, chief market analyst at IG.

The selloff extended across Europe, with Germany's DAX losing 0.6% and France's CAC 40 shedding 0.9%. In the US, the S&P 500 fell 0.8% on Monday while the Nasdaq composite sank 1.6%. WTI crude rose 3.1% to $80.55 a barrel, adding to Monday's near-10% surge after President Donald Trump reinstated a blockade of the Strait of Hormuz and imposed a 20% fee on cargo passing through the waterway.

The Strait of Hormuz handles about 21% of global oil trade, and the renewed blockade threatens to tighten supply just as the market was recovering from earlier disruptions. The IEA warned that refining margins have surged to four-year highs as Middle Eastern refineries operate well below capacity, with exports of refined products from the Gulf remaining less than half of pre-war levels.

BP provided a rare bright spot for London's benchmark, with the oil major indicating that higher crude prices and stronger trading performance would support its second-quarter earnings. The positive preview shows how energy companies benefit from the geopolitical risk premium embedded in oil prices, even as the broader market rotates away from equities.

Refining Bottlenecks Deepen Supply Squeeze

The IEA's latest monthly report highlighted an unusual disconnect: crude prices had erased most of their wartime gains as barrels returned to the market, but product markets tightened dramatically. "The disconnect between apparently well supplied crude oil markets and tight product markets underpinned a rally in cracks and refinery margins to four-year highs by early July," the agency said.

Ukrainian drone attacks on Russian refining capacity have compounded the supply squeeze, reducing diesel and gasoline supplies across Russia and neighboring markets. Companies able to keep refineries running are earning considerably more turning crude into gasoline, diesel and jet fuel than they were just a few months ago.

Earnings Season Adds New Test

The geopolitical turmoil arrives as major US banks including JPMorgan Chase, Goldman Sachs and Bank of America report second-quarter results Tuesday. The Consumer Price Index release and Federal Reserve Chair Kevin Warsh's semiannual testimony to Congress later this week will provide further tests of investor sentiment.

The last time US-Iran tensions escalated to this degree in March, Brent crude briefly touched $120 a barrel before retreating as diplomatic channels reopened. The current conflict remains less intense than that episode, IG's Beauchamp said, but the risk of further escalation keeps oil prices elevated and equity markets on edge.

This article is for informational purposes only and does not constitute investment advice.