Oil prices surge 3.5%, European shares slip amid Middle East tensions

Oil prices increased as much as 3.5% while European shares started the day lower, as rising tensions between the US and Iran unsettled investors.

Brent crude moved above $86 a barrel and stands 3.4% higher at $86.15 a barrel, after the US conducted a third night of military action against Iran and Donald Trump declared a blockade of Iranian vessels along with a 20% charge on cargo moving through the strait of Hormuz.

The US president indicated the route would stay accessible with or without Iran yet the US would begin applying charges on ships using the passage, marking an apparent shift in approach. A 20% fee would cover any and all expenses required to ensure security and safety for vessels.

The FTSE 100 index in London is 0.5% lower, or 52 points down, at 10,445. The German Dax has fallen 0.55%, the French CAC declined 0.9%, the Italian borsa eased 0.7% and the Spanish Ibex dropped 1.07%.

BP has led the FTSE 100 with a 3% advance, while Shell shares are 1.7% higher, following a trading update from BP.

BP reported that net debt at the close of the second quarter is projected to drop to between $22bn and $23bn, down from $25.3bn in the first quarter. It also anticipates its second quarter oil trading result to be slightly higher than the first quarter.

Victoria Scholar, head of investment at the trading platform interactive investor, said:

That follows an exceptionally robust stretch for oil trading last quarter when the Iran conflict drove an energy shock that more than doubled earnings compared with the prior year.
It seems Middle East uncertainty will persist for the time being after the US indicated it would restore a naval blockade on Iran, reversing direction after last month moves toward a peace agreement with Iran. Sustained higher oil prices support BP share price and near-term earnings, yet the firm outlook remains highly exposed to Iran conflict developments outside its influence.

Key events

32m agoOil prices surge 3.5%, European shares slip amid Middle East tensions
2h agoIntroduction: Oil prices climb over 2% after Middle East strikes; China exports jump on AI demand

The oil price now stands more than 3% higher at $85.89 a barrel.

This marks the first time Brent crude has moved above $85 since the US and Iran declared their ceasefire.

China car exports reached a record 1m vehicles in June as part of the broader trade increase, which may heighten tensions with European and other trading partners.

Car shipments rose 71.2% in June from a year earlier to 1.06m, based on Chinese customs figures.

This places China on course to export more than 10m cars this year, up from 7.1m last year and more than double the 4.9m sold abroad in 2023, the Financial Times noted.

Sales inside China have eased sharply after Beijing ended electric vehicle subsidies and as demand for petrol and diesel cars weakened.

The rise in Chinese exports has led the EU and others to impose steep tariffs on car imports from the country.

Introduction: Oil prices climb over 2% after Middle East strikes; China exports jump on AI demand

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

Oil prices advanced more than 2% after the Middle East conflict intensified, with the US carrying out a third straight night of strikes against Iran. Two tankers came under attack in the strait of Hormuz.

Brent crude, the global benchmark, rose 2.2% to $85.15 a barrel, after reaching $85.64 in early London trading.

Donald Trump stated the US would restore its blockade of Iranian shipping in the Gulf, but pledged the strait would stay open, with or without Iran.

Susannah Streeter, chief investment strategist at the Wealth Club, said:

Markets have entered a holding pattern as investors await the next development in the Iran conflict and prepare for higher energy prices to affect economies. Brent crude has climbed further, exceeding $84 a barrel, while European gas prices have risen to levels unseen in three months.

China exports increased sharply last month, supported by orders for chips and computing power to meet global AI demand.

Exports grew 27% from a year earlier in US dollar terms, the largest gain in four months, according to Chinese customs data. They exceeded May 19.4% rise and the 18.2% increase predicted by economists.

This suggests China is likely to record a trade surplus above $1 trillion for a second year, despite slower growth in major economies and trade frictions with Washington. It depends heavily on export sales to offset weak domestic demand amid a prolonged property downturn.

Imports jumped 36% after May 27.4% gain, reaching a five-year high. Economists had forecast 24% growth for June. China recorded a trade surplus of $125.6bn in June, up from $105.4bn in May.

The increase in global AI investment is offsetting the export impact from the Middle East conflict.

Xu Tianchen, a senior economist at the Economist Intelligence Unit in Beijing, said:

Continued export strength, largely driven by AI, signals a stronger second half, together with a more expansionary policy mix, faster fiscal spending and mild monetary easing, as well as reduced tensions in the Middle East, which will help China through lower oil prices.
Yet domestic demand continues to weigh. Retail sales stay largely flat and fixed asset investment was negative last month.

Annual exports represented 24% of total manufacturing sales over the first four months of this year, according to a recent Gavekal Dragonomics report, the highest level since China joined the World Trade Organization in 2001. In 2019, the ratio was 18.3%, and rose to 22.3% last year. The report noted:

That level would be viewed as high for a small export-oriented nation; for the world second-largest economy, it stands out.

Zhiwei Zhang, chief economist at Pinpoint Asset Management, told Reuters:

I expect exports to stay strong in the second half of the year. At the same time, it adds further pressure on trade tensions between China and its trading partners, Europe in particular.

Analysts observed that rising semiconductor prices are lifting both import and export values.

Imports from South Korea, a leading chip producer, increased 85% last month, while purchases from Taiwan, another major semiconductor maker, climbed 41.1% over the same period.

Customs vice minister Wang Jun expressed confidence that exports would remain resilient into the second half of the year led by technology, despite external pressures.

The Agenda

9am BST: Bank of England governor Andrew Bailey speech
1.30pm BST: US inflation for June (previous: 4.2%; forecast: 3.8%)
3pm BST: US Federal Reserve chair Kevin Warsh testifies