By Georgina McCartney
HOUSTON, Aug 26 (Reuters) - Oil prices fell on Wednesday, as investors monitored talks between Iran and Oman on the Strait of Hormuz and a smaller-than-expected rise in U.S. crude stocks curbed losses.
Brent crude futures were down 71 cents, or 0.8%, to $87.87 a barrel at 10:48 a.m. EDT (1450 GMT). West Texas Intermediate crude futures were down 48 cents, or 0.58%, at $81.88.
Both benchmarks fell to their lowest levels since August 10 earlier in the session on hopes of an increase
in traffic through the strategic strait. They pared some losses after official oil stock data showed U.S. crude inventories rose by less than expected last week. [EIA/S]
Crude inventories increased by 95,000 barrels to 428.9 million barrels in the week ended August 21, the Energy Information Administration said, compared with analysts' expectations in a Reuters poll for a 597,000-barrel rise.
IRAN AND OMAN WORK ON DETAIL
Analysts said the talks between Iran and Oman had shifted the mood in the market.
"The market has moved from pricing a high probability of prolonged disruption and renewed escalation towards pricing partial reopening, negotiated shipping arrangements and a lower risk of renewed military confrontation," said Saxo Bank head of commodity strategy Ole Hansen.
"A credible agreement that rapidly restores Hormuz traffic could remove another layer of geopolitical premium."
Iran and Oman are working on the details of the agreement on the strait, a senior Iranian source said on Wednesday, after Iran's Revolutionary Guards said the two countries had agreed how to share the waterway and its revenues.
Until U.S.-Israeli airstrikes began a war on Iran at the end of February, the Strait of Hormuz was the route for around a fifth of global oil and gas supplies.
Only five commodity vessels transited the waterway on Tuesday, preliminary data from ship tracker Kpler showed, down from the 10-day average of 15 and well below pre-war levels.
Efforts to reach a broader settlement to the Iran conflict are also continuing. Pakistan and Iran made "significant progress" in talks, Pakistan's interior minister said on Tuesday at the end of a visit to Tehran.
Elsewhere, Ukraine's military struck Lukoil's NORSI oil refinery in the Nizhny Novgorod region overnight, the Ukrainian General Staff said on Wednesday.
(Reporting by Georgina McCartey in Houston, Anushree Mukherjee in Bengaluru, Enes Tunagur in London, Yuka Obayashi in Tokyo and Siyi Liu in Singapore. Editing by Elaine Hardcastle, Mark Potter and Barbara Lewis)
