The price of oil has fallen sharply on hopes that a pause in attacks between the US and Iran could help lead to a resolution to the conflict. Brent crude, the global benchmark for oil, sank more than 9% to below $88 a barrel at one point, a sharp turnaround from last week when it had risen above $100.
The fall came after the US ambassador to the UN said attacks on Iran had been halted for a second night in a row to give
talks some space. An Iranian army spokesperson said on Sunday that Tehran had halted
retaliatoryattacks in the region in response.
The outbreak of the Iran war triggered a sharp rise in oil prices as the conflict led to the effective closure of the Strait of Hormuz, a key shipping route which usually carries about 20% of the world's oil and liquefied natural gas (LNG).
When Iran and the US signed a memorandum of understanding in June to halt military operations and reopen the strait, the price of oil fell back to pre-war levels of around $70 a barrel.
However, the collapse of the ceasefire earlier this month reignited fears over global energy supplies and pushed the oil price back up. Last week it hit $100 a barrel for the first time since May, with added concerns coming after Houthi militia in Yemen attacked oil tankers in the Red Sea, threatening a key export route that Saudi Arabia had used to bypass the Strait of Hormuz.
Susannah Streeter, chief investment strategist at Wealth Club, said markets were remaining
cautious given the twists and turns during this conflict. Despite the sharp fall in crude,
there is still significant uncertainty baked into these prices and a reticence about whether negotiations will lead to a lasting breakthrough, she added.
How has the conflict affected fuel and inflation?
The conflict between the US and Iran - and its impact on oil - has pushed up the cost of fuel such as petrol and diesel in many countries. This often has knock-on effects on other prices, such as food, as businesses pass on the higher costs they are facing to customers, and this can push up the rate of inflation.
Higher inflation raises the possibility that central banks will increase interest rates in an attempt to keep price rises under control.
In June, the European Central Bank opted to lift its key interest rate for the eurozone for the first time in almost three years, noting that the conflict was
generating inflation pressures.
What does this mean for interest rates?
Before the Iran war began, there had been expectations that the Bank of England would cut rates this year. However, no cuts are now expected and financial markets are currently predicting a rate rise towards the end of the year.
The Bank of England holds its latest interest rate-setting meeting this week, when it is expected to keep its key rate unchanged at 3.75%.
How did oil prices move during the conflict?
Oil prices surged when the war began because the effective closure of the Strait of Hormuz threatened a route that normally carries about 20% of the world's oil and liquefied natural gas. They then fell back to around $70 a barrel after the June memorandum of understanding, before rising again when the ceasefire collapsed earlier this month and reaching $100 a barrel last week for the first time since May.
The latest drop reflects hopes that the pause in attacks could support talks, but market participants say significant uncertainty remains over whether the negotiations will produce a lasting breakthrough.
Key Facts
- Brent crude fell more than 9% to below $88 a barrel at one point.
- The US ambassador to the UN said attacks on Iran had been halted for a second night in a row to give
talks some space
. - An Iranian army spokesperson said on Sunday that Tehran had halted
retaliatory
attacks in the region. - The Strait of Hormuz usually carries about 20% of the world's oil and liquefied natural gas (LNG).
- The Bank of England is expected to keep its key rate unchanged at 3.75% this week.
