Oil prices have fallen back sharply after US President Donald Trump announced a peace deal with Iran that could see the crucial Strait of Hormuz shipping route reopened.
Benchmark Brent crude dropped more than 5% on Monday to just over 82 US dollars a barrel, marking its lowest level for over three months.
Stock markets also jumped higher in Europe and Asia as investors breathed a sigh of relief.
London’s FTSE 100 Index rose nearly 100 points soon after opening but failed to hold on to gains through the afternoon, ending the day 41.1 points lower, or 0.39%, at 10,430.62.
It was a stronger session for stock markets elsewhere in Europe, with Germany’s Dax index up 1.05%, and France’s Cac 40 up 0.4% at close.
The deal came as Mr Trump celebrated his 80th birthday at a sports event at the White House, with the US-Iran agreement set to be signed on Friday.
But many of the details of the deal are yet to be agreed and experts fear it will take some time for the Strait of Hormuz – through which a fifth of the world’s oil and gas supplies are normally shipped – to be fully reopened.
A lot of oil infrastructure has also been damaged in the conflict, which will need to be repaired and rebuilt.
The strait has effectively been closed since the US and Israel began their war on Iran on February 28.
Its blockade has sent the cost of crude rocketing – to as much as 120 dollars a barrel at one stage – with wholesale energy costs also sent racing higher, leading to fears over soaring inflation in the UK and worldwide.
The International Monetary Fund (IMF) said the ceasefire announcement was “welcome”, adding: “But should the conflict or disruptions intensify, this is a clear risk to global growth.”
The influential financial body said it remained on “high alert” as to how the conflict was impacting on the global economy, warning that energy supplies will take time to recover given the significant damage to infrastructure.
In a blog post authored by managing director Kristalina Georgieva, the IMF said Europe was among the regions to be most affected because of its reliance on imported oil and gas, noting that the European Central Bank had raised interest rates last week in response to concerns about inflation.
She also warned that higher energy prices have driven up fertiliser and food costs, which may fuel inflation in the months ahead, particularly in low-income countries.
Richard Hunter, head of markets at Interactive Investor, said the peace deal will help allay some inflationary worries at the Bank of England ahead of its next interest rate decision on Thursday.
While it is widely expected to keep rates on hold at 3.75%, the Bank is facing the unpalatable conundrum of setting monetary policy amid stalling economic growth and rising inflation.
Figures on Friday showed gross domestic product (GDP) contracted by 0.1% month-on-month in April in a sharp reversal of 0.3% growth in March.
Mr Hunter said: “The weekend developments have come at a good time for central banks, and the subsequent drop in energy prices will ease some of the Bank of England’s inflationary concerns when its latest rate announcement hits the wires on Thursday.
“With GDP currently flatlining and growth prospects unclear, the inflation part of the equation may at least be of less concern and the strong consensus is that rates will remain unchanged at 3.75% as the bank retains its data dependent approach.”
Among stocks in London, oil giants BP and Shell were among the biggest fallers on the FTSE 100, down more than 3% and 4%, respectively, at the end of the day.
But miners made big gains on Monday, with Endeavor Mining up about 7%, and Fresnillo and Antofagasta closing more than 6% higher.
