Oil giants Shell PLC (LSE:SHEL, NYSE:SHEL) and BP PLC (LSE:BP.) were a major brake on the progress of the FTSE 100 in early trading after the long weekend, as investors reacted to a sharp fall in oil prices the previous day.
Brent crude, which dropped from $107 a barrel last Thursday to below $96 on Monday, rebounded 2% on Tuesday to trade at $98.22 a barrel after fresh US and Israeli strikes on southern Iran raised fears that a fragile ceasefire could yet unravel.
BP shares were down 1.3% to 544.4p in morning trading, extending losses to 5.1% over the past month. Shell fell 1.1% to 3,173.5p, down just over 2% over the month.
On Monday, while trading in London was closed for a bank holiday, oil markets swung sharply on hopes that tensions in the Middle East could ease after Donald Trump said a "memorandum of understanding" in talks to end the US and Israel's war on Iran "has been largely negotiated".
However, the US launched strikes on southern Iran overnight, targeting missile launch sites and boats allegedly laying mines, in what Washington described as “defensive” action during the seven-week ceasefire.
This came despite a senior delegation of Iranian negotiators, including the foreign minister, parliament speaker and central bank chief, travelling to Qatar for fresh talks with the US over frozen financial assets and a possible wider deal.
Analysts at Deutsche Bank said markets were becoming more optimistic that “the days may also be numbered for the war in Iran”, with the 48-day truce suggesting the US was unlikely to pursue a sustained escalation unless “there was absolutely no alternative”.
Oil majors have benefited from higher crude prices since the conflict intensified earlier this year, though recent falls have raised concerns that earnings momentum could weaken if tensions continue to ease.