Dear reader,
The war between the United States and Iran is now in its fifth month, and this week it came back to the one place that moves markets. For much of the conflict the Strait of Hormuz, the channel that carries close to a fifth of the world’s seaborne oil, has been effectively shut to commercial traffic. A fragile ceasefire had begun to reopen it. Early this week that unravelled: Iran attacked three vessels in the strait, the United States hit back with strikes on more than 80 targets, and Brent jumped back above $78 a barrel.
For an oil-heavy market like London, that should be a clean story. It wasn’t. The FTSE 100 moved less than 2 per cent at the index level while the stocks inside it swung far harder, and several moved in ways the headline would not lead you to expect. Energy rose, defence slipped, and the real story of the week was the spread between the winners and the losers, not the direction of the index.
The setup
The broad read is simple enough: oil is up, the Gulf has flared again, and UK-listed energy names are doing what you would expect. But that misses the more interesting point. The FTSE moved less than 2 per cent overall while individual stocks swung much harder, and several moved in ways that were not obvious from the headline alone.
After months in which the Strait of Hormuz had effectively been closed to commercial traffic, Iran attacked three vessels transiting the strait early in the week, including a Qatari LNG carrier and a Saudi oil tanker. The United States replied on 7 and 8 July with strikes on more than 80 targets, hitting command-and-control networks, coastal radar sites, anti-ship missile capabilities and more than 60 Islamic Revolutionary Guard Corps small boats. Iran said it had targeted 85 US military sites in Bahrain and Kuwait. The Treasury then revoked the temporary waiver allowing sales of Iranian oil, and Trump said at the NATO summit in Ankara: “For me, I think it’s over.”
One detail matters more than the amount of firepower. The strikes hit Qeshm Island, Bandar Abbas and Sirik, all tied to control of the strait, rather than Tehran or Iran’s nuclear infrastructure. That suggests a calibrated response aimed at reopening the waterway rather than toppling the regime. Berenberg’s Holger Schmieding made a similar point, arguing that both sides still have an interest in containing the conflict. Others took the opposite view, warning that Iran may try to tighten its grip on the Strait of Hormuz in the weeks ahead.
The strait matters because it carries close to a fifth of the world’s seaborne oil and a large share of liquefied natural gas. Brent, which had slipped back below $72 a barrel earlier in the week on hopes that flows were normalising, jumped to $78.10, up $3.94 on the day, with WTI at $74.04.
The index move
The FTSE 100’s relative performance was more interesting than the move itself. On Tuesday it closed 0.3 per cent higher at 10,684, even as technology stocks sold off across the Continent, with Diageo, Associated British Foods and Shell all helping. On Wednesday, after Trump’s comments, it fell as much as 1.6 per cent intraday, which was still better than the 2.5 per cent drop in Germany’s DAX and the 2.2 per cent decline in France’s CAC 40.
That gap is structural. London has less exposure to technology and semiconductors than Frankfurt or Paris, so it is less exposed when AI and chip names wobble. It also has more energy weight, which gives it a built-in cushion when oil rises. In a geopolitical shock, an index tilted toward oil, banks and consumer staples behaves differently from one built around growth stocks.
The stock moves
BP led the FTSE 100 higher, rising as much as 3.9 per cent, while Shell also moved up. Shell had its own support too, after raising its second-quarter gas production forecast and flagging stronger gas trading. Smaller producers moved even more sharply, with Harbour Energy, Ithaca Energy, Gulf Keystone Petroleum, Serica Energy and Diversified Energy all up 3 per cent or more, while Hunting climbed alongside them.
The pattern is straightforward. Higher crude lifts producer cash flows quickly, but the smaller names usually have more torque to the barrel than the majors. The majors are the income names; the smaller producers are the more leveraged trade. They can look similar on a screen, but they are very different holdings.
Centrica also firmed as UK wholesale gas prices jumped above 117p per therm, from just below 102p a week earlier, while the European TTF benchmark rose more than 4 per cent. If Hormuz disrupts LNG flows, that matters directly for the gas the UK imports and burns.
The surprise
Airlines fell, which made sense. Fuel is a major cost for carriers and not something they can fully hedge away. IAG and Wizz Air were lower, even as Jet2 reported a £250m share buyback and said summer bookings were up 7.1 per cent. That is a good reminder that company-specific news and sector-wide pressure can easily land on the same day.
The more surprising move was in defence. You would usually expect defence and aerospace to rally during live strikes, but they moved the other way. Babcock fell around 4.5 per cent, Melrose dropped 3.8 per cent, and Rolls-Royce was also lower, even as NATO leaders unveiled fresh arms spending in Ankara.
That reversal makes more sense once you step back. Defence had already run hard for more than a year, so some profit-taking was probably due. The Ankara announcements confirmed a lot of spending the market had already been expecting. And when money rotates hard into oil, it has to come from somewhere. Valuation matters too. As one analysis of the sector put it, “when multiples are full, shares can ease on no news at all.”
The real signal sits in the curve, not the index level.
The flat-looking index and tidy list of winners and losers hide two more important signals.
The first is a shift in the supply story. Not long ago, the market was positioned for oversupply, with OPEC+ raising quotas and Gulf producers pushing output higher. That has flipped. Scarcity risk is back in the price, and those narrative turns often matter more than the day-to-day fundamentals.
The second is the Brent curve. It has moved back into backwardation, which means near-dated barrels are trading above later deliveries. In plain English, supply is tight right now. But the far end of the curve has moved much less, which suggests the market still thinks the disruption will pass. So the oil price is pricing a risk premium that could fade as quickly as it arrived.
Three paths
It makes more sense to think in scenarios than to pretend the next move is obvious.
If the situation escalates and the strait closes again, Brent can move decisively through $80. That would be the best outcome for energy names, especially the producers, and the worst for much of the rest of the index. It would also feed into UK inflation and keep pressure on rate-sensitive stocks.
If the conflict settles into a grinding stalemate, Brent probably stays in a wide range around the high $70s. That is the most plausible path. In that case, the majors can still cover their dividends comfortably, while the smaller producers remain the more volatile end of the trade.
If there is de-escalation and a credible ceasefire, crude can quickly drift back toward the low $70s. Energy names would give back some of the week’s gains, defence might stabilise, and more domestic and rate-sensitive names could recover as the inflation scare fades.
The main point is that the majors are a through-cycle cash-generation story, not a one-week trade. The smaller producers are a leveraged bet on how long the conflict lasts. That distinction matters more than the headline.
The UK squeeze
Oil is only the first-order effect. The more important read-through runs through sterling, inflation and rates.
Sterling slipped to around $1.33 as risk sentiment worsened. A weaker pound makes imported energy more expensive, which adds to the pressure from higher gas and oil. The Bank of England has already signalled that a near-term rate cut is off the table, and a sustained energy premium makes that even harder to reverse. That is bad news for REITs, infrastructure, renewable trusts and other income assets that compete with cash and bonds.
So a move that helps a few energy names at the index level can still tighten the screws on a much broader part of the market underneath. That is why the index level is not the best way to read this week.
What to watch
Three dates matter next. The wind-down of Iranian oil sales completes on 17 July. Shell’s second-quarter results land on 30 July. And the Doha-track negotiations remain the key swing factor, because crude has been reacting more to tone than to substance throughout the conflict.
For now, the FTSE has done what a mature, income-heavy index tends to do in a shock. It absorbed the blow at the index level and pushed the real action down into the stocks beneath it. Energy won, fuel cost more, and the market quietly priced in a premium that may not last.
Thanks for reading,
Ollz
This article is for information only and reflects my own opinions and analysis. It is not financial advice or a recommendation to buy or sell. Do your own research and consult a qualified financial adviser before investing. Your capital is at risk.