As we write, it seems the Middle East is in de-escalation mode, a shift which has seen oil prices give back a large portion of their recent gains and investors rediscover their risk appetite.

US strikes on Iranian nuclear facilities on 21 June raised the temperature before Iran came up with what appeared to be a fairly modest response in the form of a pre-warned strike on a US base in Qatar. This proved the precursor to the announcement of a ceasefire between Iran and Israel.

Whether the cessation in hostilities holds, with Israel accusing Iran of having violated the ceasefire a matter of hours after it had been announced, will determine what happens next.

A lot of the attention has focused on the strategically-important Strait of Hormuz, through which 20% of global oil and 20% of the world’s liquefied natural gas passes. Any threat to this waterway could quickly lead to a renewed surge in energy prices.

JPMorgan has signalled that in a worst-case scenario, where the production and supply of oil from the Persian Gulf is affected, crude could trade at $130 per barrel.

However, oil, which briefly traded above $80 per barrel before dropping below $70, has pretty weak fundamentals right now.

This reflects an uncertain global economic backdrop, and the implications that has for demand, and producers’ cartel OPEC+ boosting supply by increasing its output.

Therefore, without the threat posed by mounting Middle East tensions, it is not a surprise to see crude on the back foot. The slump on 23 June represented its largest one-day fall since 2022.

Gold prices also slipped back, and traditionally defensive sectors like tobacco and utilities struggled as investors moved out of traditional safe havens.

The heavy weighting for energy stocks, precious metals miners and other defensive areas meant the FTSE 100’s gains were more limited than seen elsewhere.

However, lower oil prices may provide central banks with greater scope to lower rates as one source of inflationary pressure eases. 

Suggestions from Federal Reserve vice-chair Michelle Bowman that a cut could be on the cards at its next summit on 30 July, should inflation remain under control, back up this thinking. 

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