Global oil prices fell to their lowest level since late August on Tuesday after US President Donald Trump indicated that the war with Iran was nearing an end, raising hopes of an easing of geopolitical tensions and a recovery in global financial markets.
Brent crude, the international oil benchmark, dropped nearly 3% to $89.66 a barrel, its lowest level since August 31. The decline followed a sharper fall of nearly 6% on Monday as investors responded to signs that the conflict in the Middle East could be approaching a resolution.
Trump's comments at a White House press conference helped calm fears of further military escalation. The US president suggested that additional military strikes against Iran were not immediately necessary, citing the security of Israel and Gulf allies. However, he maintained that American forces remained prepared to respond if required.
The prospect of reduced tensions in the Middle East lifted investor sentiment across European markets. The pan-European Stoxx 600 index rose 0.9% to 662.54 points, approaching the record high reached in early August when expectations of a possible peace agreement had boosted equities. London's FTSE 100 gained 45 points, or 0.4%, to reach 10,828.
Airline stocks benefited from the decline in crude prices, as lower fuel costs could improve profitability. Lufthansa shares advanced 1.8%, while Air France-KLM gained 1.2%.
However, energy companies faced selling pressure as falling oil prices threatened their earnings outlook. BP shares declined 1.7%, while Shell slipped 1.5%.
The decline in oil prices also raised expectations that inflationary pressures could ease in major economies. Analysts believe lower energy costs, combined with renewed investor interest in technology stocks, are supporting the recovery in global equity markets.
However, uncertainty remains over the direction of US monetary policy.
The US Federal Reserve is expected to assess the latest inflation figures before considering any changes to interest rates. October's US inflation data, scheduled for release on Tuesday, could influence market expectations regarding future borrowing costs.
A stronger-than-expected inflation reading could revive concerns that interest rates will remain elevated for longer, potentially putting pressure on technology stocks and other interest-rate-sensitive investments.
A sustained decline in crude prices could eventually translate into lower fuel costs for consumers and businesses. For major oil-importing economies such as India, softer crude prices could help reduce the import bill, ease inflationary pressures and support the rupee.
However, the extent of the benefit will depend on whether the decline in international oil prices is sustained.
Despite the improved market sentiment, investors remain cautious about the durability of any peace agreement and the possibility of renewed geopolitical tensions.