By Shariq Khan and Anushree Mukherjee
NEW YORK, Aug 25 (Reuters) - Oil prices fell about 4% to a one-week low on Tuesday as traders shrugged off the latest U.S. sanctions campaign against Iran, viewing economic pressure as posing less risk to oil supplies than a military escalation.
Brent crude futures were down $3.83, or 4.2%, to $88.34 a barrel by 11:44 a.m. EDT, while U.S. West Texas Intermediate crude futures fell $3.34, or 3.9%, to $81.67.
Both benchmarks hit their lowest levels since August 17.
The shift from military conflict to economic pressure in the U.S.-Israeli war with Iran has reduced some of the oil market's anxiety, said Saxo Bank head of commodity strategy Ole Hansen, adding the U.S. sanctions announcement was not as forceful as some traders had expected.
Treasury Secretary Scott Bessent unveiled the measures on Monday, almost six months into a conflict the U.S. has struggled to resolve. But he declined to identify the countries that would be targeted or say when penalties would take effect, adding he would give them time to comply with the new directives.
The economic pressure campaign has revived expectations of talks between the U.S. and Iran to resolve their conflict, which began when the United States and Israel launched military strikes on Tehran at the end of February, oil trading advisor Ritterbusch and Associates said.
Still, Tuesday's sharp decline in oil prices appears to be an 'overreaction' by market participants, Ritterbusch and Associates said. They cautioned traders that the market could swing sharply higher if Iran retaliates with military strikes on U.S. installations in the Middle East.
Iran has vowed to retaliate against the U.S. sanctions and expressed confidence that major trading partners would resist Washington's pressure campaign.
SUPPLY DISRUPTION RISKS REMAIN
"Iran still retains the ability to respond by disrupting shipping, which continues to keep a residual premium in the oil price," said Tim Waterer, chief market analyst at KCM.
An oil tanker was struck on Tuesday by an unidentified projectile and disabled about nine nautical miles (16.7 km) northeast of Oman's Ash Shishah, the United Kingdom Maritime Trade Operations said.
Just two tankers transited the Strait of Hormuz on Monday, the lowest daily tally of commodity vessels since early May, with both entering the Gulf, shipping data showed.
The conflict has heightened concerns over the Strait of Hormuz, the waterway through which roughly one-fifth of global oil consumption used to typically pass before the U.S.-Israeli war with Iran began on February 28, raising fears of broader supply disruptions.
The supply disruptions have prompted countries to draw down commercial and strategic oil reserves.
Elsewhere, the Novoshakhtinsk oil refinery in Russia's southern Rostov region was damaged by a Ukrainian drone overnight and suspended operations, the regional governor said, while a fire broke out at the Atyrau oil refinery in western Kazakhstan on Tuesday, owner KazMunayGas said.
(Reporting by Anushree Mukherjee and Ishaan Arora in Bengaluru and Jeslyn Lerh in Singapore; Editing by Mark Potter, Emelia Sithole-Matarise and Nick Zieminski)
