By Ishaan Arora
July 28 (Reuters) - Oil prices fell 1% on Tuesday as market participants continued to weigh a pause in U.S. strikes on Iran, which has raised hope of a diplomatic solution to their conflict and the normalisation of Middle East energy flows.
Brent crude futures were down $0.54, or 0.6%, at $87.82 by 0046 GMT. U.S. West Texas Intermediate crude was at $81.95 a barrel, down $0.66, or 0.8%.
Both contracts fell 1% earlier in the session to their lowest level in more than a week.
U.S. President
Donald Trump said on Monday the United States was having "good talks" with Iran and that there was a chance of a resolution. However, he said U.S. strikes would resume if negotiations failed while Iran issued similar comments about retaliation.
"For now, the relief that an off-ramp has been found has taken the heat out of prices and eased concerns around Houthi attacks on Saudi infrastructure. However, the situation remains highly fluid," IG analyst Tony Sycamore said in a client note.
Afrah al-Zouba, the foreign minister-designate of Yemen's internationally recognised Saudi-backed government, said Yemen-based Houthi fighters aimed to replicate Iran's control of shipping through the Strait of Hormuz at Bab el-Mandeb.
"Whether the Houthis have the military capacity to enforce a comprehensive blockade is questionable, especially given that the Saudis will attack them relentlessly. Still, there is no doubt that traffic has dropped off significantly in the Red Sea and the Strait of Hormuz," said Marex analyst Edward Meir.
"A key reason prices are not even higher than they are right now is the demand destruction that is taking place, especially in Asia," Meir said.
Barclays analysts said in a note on Monday "flows through the strait remain subdued". They said, in the week ended July 24, crude oil and refined product net exports through the strait averaged 2.9 million barrels a day compared with 5.9 million in the previous week.
Elsewhere, U.S. crude oil stockpiles likely fell last week alongside gasoline, while distillate stocks likely rose, a preliminary Reuters poll showed on Monday. [EIA/S]
(Reporting by Ishaan Arora in Bengaluru; Editing by Chris Reese and Christopher Cushing)
