By Mohi Narayan
NEW DELHI, July 30 (Reuters) - Oil prices erased some of their previous gains on Thursday, despite escalating attacks in the Gulf as investor focus shifted to supply flows through the key chokepoints in the region.
Brent futures fell 96 cents, or 1.06%, to $89.78 a barrel as of 0418 GMT. U.S. West Texas Intermediate (WTI) crude fell 64 cents, or 0.76%, to $83.82 a barrel.
Brent settled up 7.91% in the previous session and WTI up 6.56% in one of the sharpest spikes of the Iran war, reversing
a 5% plunge on Tuesday after a pause in hostilities in the five-month conflict.
Prices surged as U.S. President Donald Trump threatened on Wednesday to hit Iran "very hard" after an Iranian missile attack on Tuesday on a U.S. base in Jordan.
On Wednesday, the U.S. and Saudi Arabia attacked Iran-backed paramilitary forces in Iraq, the first time that Saudi had publicly joined U.S. air strikes, in retaliation for drone attacks on Saudi oil targets launched from Iraq.
The U.S. also carried out two hours of attacks on Iran on Wednesday, the U.S. Central Command said. That ended a lull in U.S. strikes on Iran that began over the weekend.
"Trump’s 'hit hard' rhetoric caused the price spike immediately but looks like the market has fully priced (that) in and (is) considering the 'TACO' possibility right now," said Lin Ye, vice president of commodity markets, oil, at Rystad Energy, referring to the acronym Trump Always Chickens Out.
Ye said the market is following a pattern: geopolitical headlines are triggering rapid price spikes, but those gains are often short-lived as actual supply flows and parallel diplomatic efforts tend to determine how long those upward price moves persist.
Prices are being capped as crude supply is still moving from the key Gulf region despite the near shutdown of the Strait of Hormuz. Iran closed the waterway, through which around a fifth of global oil and gas flows previously passed, after the U.S.-Israeli war began on February 28.
Rystad Energy estimates about 13 million barrels per day of oil from the Gulf is still reaching markets.
Even after the Iran-aligned Houthis in Yemen imposed a naval blockade on Saudi Arabia in the Red Sea on July 20, disrupting shipping in the Bab el-Mandeb strait, some cargoes, particularly on Chinese-connected tankers, have flowed to markets.
"While overall volumes are reduced, oil continues to leak out of the region through multiple channels, and additional workarounds are being explored. The longer this situation persists, the more these alternative routes and methods will erode Iran's leverage over the Strait of Hormuz," IG market analyst Tony Sycamore said in a note.
(Reporting by Mohi Narayan in New Delhi and Colleen Howe in Beijing; Editing by Lincoln Feast and Christian Schmollinger.)
