By Shariq Khan
NEW YORK, July 27 (Reuters) - Oil prices fell on Monday, settling at their lowest levels in over a week, after the U.S. abruptly suspended a campaign of air strikes against Iran over the weekend, raising hopes of a diplomatic solution that would allow shipping to resume in the Strait of Hormuz.
Brent crude futures fell $8.42, or 8.7%, to settle at $88.36 a barrel, the lowest since July 17. U.S. West Texas Intermediate crude futures fell $6.70, or 7.5%, to close at $82.61, the lowest since July 16.
Brent futures last week surpassed $100 a barrel as the conflict, which has reduced oil shipments via the Strait of Hormuz, spilled over to the Red Sea. This hindered exports from the world's top exporter, Saudi Arabia, via the Bab el-Mandeb strait to Asia.
The U.S. ambassador to the United Nations, Mike Waltz, told "Fox News Sunday" and other U.S. media that President Donald Trump had decided to pause U.S. attacks to allow more time for diplomacy.
Trump on Monday said the U.S. is holding "good talks" with Iran, and that "there's a good chance that something could happen" in regard to a potential deal. He also threatened "strong military action" if diplomacy fails.
Oil prices fell throughout Monday's session, as Saudi Arabia's air defenses intercepted and destroyed drones launched from Iraq. Yemen's Houthis claimed they had targeted sensitive crude oil supply and transport sites linking eastern Saudi Arabia to the critical Red Sea oil export hub of Yanbu.
"The market seems to be forever seeking good news from an arena that really is not providing any," said PVM analyst John Evans.
"A stay of military strikes might seem an improvement, but it does not come with any guarantees that oil will soon flow from the area," he said. He said oil futures will only continue lower if elevated price levels again dent demand, not due to "questionable mini-ceasefires".
OUTLOOK UNCERTAIN WITH NO SIGNED FRAMEWORK
Industry analysts said they expect oil markets to be highly volatile in response to updates around the unofficial ceasefire between the U.S. and Iran, and warned that the physical flow of oil remains constrained despite the truce.
"Shipping volumes remain heavily depressed after a brief mid-June ceasefire, limiting Middle East exports and forcing longer, costlier reroutes via Suez for Saudi Red Sea cargoes," said Alex Hodes, director of energy market strategy at brokerage StoneX.
Fewer than 10 commodity vessels passed through the Strait of Hormuz daily during the weekend, shipping data from Kpler showed.
"Flows fell to something like 15% of pre-war levels, against a normal run rate of roughly 20 million barrels a day of crude, condensate and products. A political pause doesn't put a single extra barrel on the water right here and now," said Ole Hvalbye, market analyst at SEB Research.
In addition, ship traffic through the Bab el-Mandeb strait fell on Sunday after Yemeni Houthis attacked Saudi oil installations along the Red Sea coast, although a third Chinese supertanker exited via the waterway.
Elsewhere, Kazakhstan, among the world's 10 biggest oil producers, has more than halved its daily oil output following the closure of the main exporting terminal in Russia's Black Sea over drone attacks, an industry source said on Monday.
The energy ministry later said the Caspian Pipeline Consortium's Black Sea terminal had resumed oil loadings.
(Reporting by Shariq Khan, Seher Dareen, Florence Tan and Trixie Yap, Additional reporting by Anushree Mukherjee; Editing by Emelia Sithole-Matarise, Aurora Ellis, Jan Harvey and David Gregorio)
