(Sharecast News) - European shares closed lower on Wednesday as oil prices surged after reports that the US was preparing for an extended blockade of Iranian ports, raising concerns about prolonged disruption to energy markets and renewed inflationary pressure.
The pan-European Stoxx 600 fell 0.65% to 602.64.
Germany's DAX declined 0.31% to 23,943.74, France's CAC 40 lost 0.48%, and London's FTSE 100 dropped 1.16% to 10,213.11.
In commodities, Brent crude futures were last up 5.84% on ICE at $117.76 per barrel, while the NYMEX quote for West Texas Intermediate rose 5.75% to $105.68.
"The $110 per barrel alarm bell is increasingly ringing in the heads of investors and has put global markets under renewed pressure," said Danni Hewson, head of financial analysis at AJ Bell.
US president Donald Trump was reportedly considering an extended blockade of Iranian ports to squeeze the country's economy and oil exports rather than resume his bombing campaign.
The Wall Street Journal, citing US officials, reported that Trump had instructed aides to prepare for a prolonged naval blockade, after deciding in recent meetings, including a Monday discussion in the Situation Room, that resuming bombing or walking away from the conflict carried more risk than maintaining the blockade.
Kathleen Brooks, research director at XTB, said investors hoping for the blockade to end this week had been "deeply disappointed", adding that markets would now need to price in the prospect of a prolonged blockade.
"This is a new phase of the war in Iran, and we could now see oil prices go back to the March highs around $120 per barrel for Brent," she said.
Brooks also cautioned that Trump's rhetoric on Truth Social may not reflect reality, but said markets could be underpricing the risks if the blockade proves long term.
Chris Beauchamp, chief market analyst at IG, said: "Oil's sojourn below $100 didn't last long, and it was never going to while the Straits of Hormuz remain closed.
"Now, with the blockade expected to roll on for weeks the oil market is once again reflecting the growing panic around the globe.
"At some point equities might start to notice properly, but for now they are keeping their eyes firmly on US earnings growth."
Investors were also weighing news that the United Arab Emirates plans to leave OPEC and OPEC+ from 1 May.
Rabobank said the move did not alter the near-term supply-demand balance, adding that only after the Iran war ends and the Strait of Hormuz reopens could markets discuss the UAE increasing oil production.
German inflation rises as investors look to Fed
On the economics front, investors were looking ahead to the US Federal Reserve's rate decision later in the day, with the central bank expected to hold its policy rate at 3.50% to 3.75%.
Decisions from the Bank of England and the European Central Bank were due on Thursday.
"The nervousness in markets is palpable. So much rides on the next 24 hours or so, thanks to the Fed meeting and the tech giants," Beauchamp said.
"Earnings growth has been the one thing keeping markets from completely losing it about the surge in oil prices, so it is up to the heavyweights tonight to deliver the goods in terms of earnings growth and a solid outlook.
"Meanwhile, Powell's last meeting is unlikely to deliver any epic farewells from this most careful of Fed chairs, but it would be a surprise if the committee managed to restrain itself from commenting on the 20% surge in oil prices over the past week."
Elsewhere, German inflation rose to its highest level in 27 months in April, as energy prices climbed on supply disruptions linked to the Middle East conflict.
Consumer price inflation increased to 2.9% from 2.7% in March, according to the Federal Statistical Office, below economists' expectations for 3.0% but the highest rate since January 2024.
Core inflation, excluding food and energy, eased to 2.3% from 2.5%, its lowest level since June 2021.
Energy prices rose 10.1% year-on-year after a 7.2% increase in March, while food inflation accelerated to 1.2% from 0.9%.
In the UK, business conditions across the private sector are expected to worsen, according to the Confederation of British Industry's latest Growth Indicator survey.
A net 25% of firms expected activity to fall over the next three months, the weakest balance since December, while a net 24% reported declines in the three months to April.
Alpesh Paleja, the CBI's deputy economist, said businesses were facing uneven trading conditions, strong cost pressures and renewed uncertainty, with the Middle East conflict increasingly hitting a broad range of UK firms.
UBS rises on better-than-expected profit, Deutsche in the red
Among equities, UBS rose 3.22% after the Swiss bank reported a better-than-expected $3bn first-quarter net profit.
Deutsche Bank fell 1.83% after reporting a 519m credit loss provision, which was higher than forecast.
Adidas gained 8.35% after the German sportswear group's first-quarter profits beat expectations, while Sopra Steria jumped 17.54% after a first-quarter trading update.
ThyssenKrupp surged 9.86% after Finland's Kone agreed to buy TK Elevator for around $23.66bn, in a deal that would create the world's largest elevator maker by sales.
ThyssenKrupp retained a minority stake in the elevator business following its 2020 sale to a consortium.
Reporting by Josh White for Sharecast.com.
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