By Anushree Mukherjee
July 28 (Reuters) - Oil prices extended losses on Tuesday, hitting their lowest levels in more than a week as hopes for a resolution to the U.S.-Iran conflict grew and traders continued to assess developments in the Middle East.
Brent crude futures were down $1.75, or 1.98%, at $86.61 by 0739 GMT, after hitting their lowest level since July 17. U.S. West Texas Intermediate crude was at $81.35 a barrel, down $1.26, or 1.53%, after marking its lowest since July 20.
U.S. President
Donald Trump said on Monday Washington was having "good talks" with Iran and that there was the chance of a resolution. However, he said U.S. strikes would resume if negotiations failed while Iran issued similar comments about retaliation.
"While flows of vessels through the Strait of Hormuz remain low, the market hopes the situation improves based on new talks between Oman and Iran on a new mechanism for Hormuz," said UBS analyst Giovanni Staunovo.
Oman has presented a proposal to Iran for a joint regional mechanism to manage the Strait of Hormuz with voluntary fees, a Gulf source told Reuters on Tuesday.
The Strait of Hormuz handles roughly a fifth of global oil consumption and is one of the world's most important oil shipping chokepoints.
The conflict has disrupted shipping beyond the Strait of Hormuz, with traffic through the Bab el-Mandeb strait also affected. Prices surged last week on fears the attacks could lead to the closure of the Bab el-Mandeb route, the second-most important oil shipping chokepoint after the Strait of Hormuz.
However, the number of vessels passing through Bab el-Mandeb rose to 28 on Monday, a four-day high, while traffic through the Strait of Hormuz remained low, according to Kpler shipping data.
Analysts warned the risks to supply disruptions spreading to the Red Sea remain elevated after Saudi Arabia said it shot down drones aimed at petroleum targets, including in Riyadh. It said Iran-backed armed groups had launched the weapons from Iraq, and it reserved the right to respond.
Separately, Iran's Houthi allies in Yemen said they had targeted the East-West Pipeline carrying oil to Saudi Arabia's main Red Sea port of Yanbu in retaliation for Saudi drone incursions.
Goldman Sachs expects Brent to moderate to $80 by year-end if Hormuz fully reopens by the fourth quarter, but Red Sea disruptions and attacks on Saudi oil infrastructure may pose a new source of upside risk for crude and refined products prices.
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 and Siyi Liu in Singapore; Editing by Christopher Cushing, Stephen Coates, Kate Mayberry, Alexandra Hudson)
