Oil prices fall as US and Iran announce pause in military strikes

Brent crude sank more than 9 percent to below $88 a barrel on Sunday after the United States and Iran announced a mutual halt in military strikes to allow diplomatic negotiations to proceed.

The price drop marks a sharp reversal from last week, when oil had risen above $100 a barrel for the first time since May, driven by fears that escalating US-Iran conflict could disrupt energy supplies through the Strait of Hormuz, which according to BBC reporting carries roughly 20 percent of the world's oil and liquefied natural gas.

According to the US ambassador to the United Nations, 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 announcement came after the collapse of a June memorandum of understanding between the countries that had temporarily stabilized energy markets. When that earlier agreement was signed, the price of oil fell back to pre-conflict levels of around $70 a barrel.

The renewed fighting had reignited fears over global energy supplies. The conflict between the US and Iran pushed up the cost of fuel such as petrol and diesel in many countries, per BBC reporting. Higher fuel costs carry knock-on effects on other prices, such as food, as businesses pass on higher costs to customers, potentially pushing up the rate of inflation. Higher inflation raises the possibility that central banks will increase interest rates.

In June, the European Central Bank lifted its key interest rate for the eurozone for the first time in almost three years, citing inflation pressures generated by the conflict. Before the Iran war began, there had been expectations that the Bank of England would cut rates this year. No cuts from the Bank of England 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 percent.

Yet market participants remain hesitant about the durability of the pause. Susannah Streeter, chief investment strategist at Wealth Club, stated that markets were remaining "cautious given the twists and turns during this conflict" and cautioned that "there is still significant uncertainty baked into these prices and a reticence about whether negotiations will lead to a lasting breakthrough." The brief earlier collapse of the June agreement underscores why investors are wary: the conditions that prompted the breakdown remain unaddressed in the brief's account of the current talks.

The ceasefire's stability will determine whether the energy-price relief holds. If the pause collapses again, markets would likely price in renewed supply risk and inflation pressure, potentially forcing central banks to maintain or raise rates at a moment when economies are already straining under higher borrowing costs.