Oil prices fell on Tuesday in Asian trade, as concerns about supply risks stemming from the U.S. blockade of the Strait of Hormuz were allayed by signs of possible talks to end the U.S.-Iran war, Reuters reported.
Brent futures declined 76 cents or 0.8%, to $98.57 by 0601 GMT, while U.S. West Texas Intermediate (WTI) crude fell $1.63, or 1.65%, to stand at $97.45.
The U.S. military said on Monday its blockade of the Strait of Hormuz would extend east to the Gulf of Oman and Arabian Sea, while ship-tracking data showed two ships turned around in the Strait as the blockade started.
Iran threatened in response to target ports in nations bordering the Gulf, following the collapse of weekend talks in Islamabad aimed at resolving the crisis over the Strait, usually a conduit for about a fifth of global oil and gas supplies.
Investors banked on a resolution to the Middle East war even as the U.S. blocked Iran's ports after the talks collapsed.
Sources told Reuters that Washington and Tehran have left the door open to dialogue, and a U.S. official said there was forward motion to try to get to an agreement.
President Donald Trump also said Iran wanted to make a deal, though he ruled out any agreement allowing it to have a nuclear weapon.
"While supply can restart within days to weeks, restoring output is likely to take months, even for undamaged assets," the Commonwealth Bank of Australia said in a note on Tuesday.
Resumption of traffic through the Strait was the "first domino that needs to fall", it added.
"Despite the breakdown of peace talks in Pakistan over the weekend, Trump has managed to take some steam out of the oil price, again dangling the carrot of a possible deal," said Tim Waterer, chief market analyst at KCM Trade.
Sources familiar with the negotiations said dialogue between Iran and the U.S. was still alive, while Pakistani Prime Minister Shehbaz Sharif affirmed efforts to de-escalate tension.
ANZ analysts estimate that supply of about 10 million barrels per day of crude supply has effectively been removed from the market, while a prolonged U.S. blockade could curb an additional 3 million to 4 million bpd of crude shipments.
"The oil market no longer needs a worst-case escalation to justify higher pricing," ANZ added in a client note. "Tight balances alone are sufficient to sustain the price of Brent near or above recent threshold levels."
NATO allies, such as Britain and France, refrained from joining the blockade, calling instead for the vital waterway to reopen.
U.S. Energy Secretary Chris Wright suggested oil prices could peak in "the next few weeks" once shipping resumed.
The International Monetary Fund, the World Bank, and the International Energy Agency warned against hoarding energy supplies or adopting export curbs, amid a shock to the global market that they described as the most significant ever.
On Monday, IEA chief Fatih Birol said that while further strategic oil releases might not yet be necessary, the agency remains prepared to act if needed.
The Organization of the Petroleum Exporting Countries scaled back its second-quarter global demand forecast by 500,000 bpd in its latest monthly report.
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