Oil prices have dropped by 6% as traders bet that a pause in US attacks on Iran could prevent an escalation in the conflict that would further restrict global supply.
Brent crude, the international benchmark for oil, fell 6% to below $91 a barrel on Monday morning, after briefly dropping below $90 earlier in the morning. Futures prices hit $100 last week when the Iran-aligned Houthis attacked Saudi Arabian oil tankers in the Red Sea.
The US and Iran paused hostilities after 13 days offighting, with Iran saying it had stopped “retaliatory” attacks after two nights without American missiles.
The latest ceasefire follows months of wild swings in diplomatic tension, and on global markets as a result, since the US and Israel launched the war on Iran at the end of February. Iran responded by effectively closing the strait of Hormuz, a vital shipping route for Gulf nations to export to the world. That has made oil prices highly sensitive to day-to-day changes in the geopolitical outlook.
Energy companies BP and Shell were the worst performers across London’s FTSE 100 stock market index on Monday morning, with their shares down by 3.8% and 2% respectively because of the weaker oil price.
The prospects for a lasting peace are still unclear, although US military officials have told Donald Trump that the bombing campaign has reached the limits of its effectiveness, the Axios news site reported.
Trump had been persuaded to attack Iran in part because of hopes that its people would oust the regime in Tehran. However, that hope proved to be unfounded despite the death early in the conflict of the theocracy’s supreme leader, Ayatollah Ali Khamenei. Instead, the main result of the assault has been Iran blocking oil exports.
Higher oil prices could harm Trump politically, with many members of the Republican party nervous of the effects of inflation on their prospects at midterm elections in November. Some Federal Reserve policymakers may feel the need to raise interest rates to try to counteract price increases, a move that could slow the US economy – despite Trump’s wish for lower rates.
Analysts at Deutsche Bank led by Jim Reid said that the 10% increase in Brent crude prices last week had “added to fears that the global economy was facing a prolonged inflation shock, and that the Fed might need to hike rates more aggressively in response”.
Market-implied expectations for a Fed rate rise on Wednesday moved up from 14% to 38% over the course of the week.
