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The price of oil has fallen sharply on hopes that a pause in attacks between the US and Iran could help to de-escalate the conflict.

Brent crude, the global benchmark for oil, sank more than 9% to $87.59 a barrel at one point, marking 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 "retaliatory" attacks 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.

By Monday afternoon, the price of Brent stood at $90.60 a barrel, down more than 6% for the day.

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.

The wholesale price of gas has also been rising recently, and analysis from research group Wood McKenzie published last week said European gas storage was at a historic low, with supply security for this winter "at risk".

If the Strait of Hormuz remains closed for a further two months, it said storage will end up lower than 70% by 1 November, compared with a five-year average for that date of 90%.

"Low European inventories, strong Asian demand and limited new LNG supply growth almost guarantee elevated prices through this winter and into 2027," said Massimo Di Odoardo, vice president of gas and LNG research at Wood Mackenzie.

The conflict between the US and Iran has also 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".

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%.

 

SOURCE/AUTHOR : BBC NEWS/Nick Edser, Business reporter