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Oil prices declined on Thursday after a ceasefire agreement between Israel and Lebanon raised hopes of a wider deal to end the US-Israeli conflict with Iran, potentially paving the way for the reopening of the Strait of Hormuz.
Brent futures were down 87 cents, or 0.89%, at $96.92 a barrel by 0458 GMT, while US West Texas Intermediate crude fell 78 cents, or 0.81%, to $95.24, paring gains from earlier in the week.
Both Brent and WTI rose about 2% on Wednesday after renewed Middle East hostilities including Iranian attacks on Kuwait and US military strikes near the Strait of Hormuz.
Israel and Lebanon said late on Wednesday they had agreed to implement a ceasefire, raising hopes for a deal between Washington and Tehran, which has conditioned any agreement in part on an end to fighting between Israel and Lebanon.
US President Donald Trump suggested on Wednesday that there could be progress in negotiations with Iran as soon as this weekend.
Iranian Foreign Minister Abbas Araghchi on Wednesday said Tehran's contacts with Washington have not been cut off, but no progress has been made in the negotiations, adding both sides were studying the texts that were exchanged.
In the US, the Republican-led House approved a resolution on Wednesday to block Trump from continuing the war against Iran. To take effect, the resolution would need Senate approval and two-thirds majorities in both chambers to override an almost certain Trump veto.
Meanwhile, US crude stockpiles fell by 8 million barrels to 433.7 million barrels in the week ended May 29, the Energy Information Administration said on Wednesday. That was a much bigger drop than the 4-million-barrel draw analysts had expected in a Reuters poll.
The International Energy Agency warned on Tuesday that global oil inventories could hit critical levels ahead of peak summer demand if stock draws continue at their current pace, despite Chinese crude imports falling by 6 million barrels a day in May compared to March.
“Inventories have provided a cushion for the oil market. However, even if we see an imminent restart of oil flows through the Strait of Hormuz, the recovery will be slow and gradual,” a note from ING said.
“This suggests inventories are likely to continue to tighten into the third quarter, leaving upside risk to prices.”
Separately, Asian stocks fell as renewed fighting between the US and Iran rattled investors.
MSCI's broadest index of Asia-Pacific shares outside Japan was down 1.6%, while S&P 500 e-mini futures slipped 0.4%. Korean shares reopened as much as 2.6% lower after a holiday, while Japan's Nikkei 225 slumped 1.4%.
"Financial markets shifted back into a risk-off mode as the US and Iran exchanged fire again," analysts from Westpac wrote in a research report.
Stocks on Wall Street dropped overnight, with the S&P 500 falling 0.7% and oil prices rising around 2% as talks between Tehran and Washington showed little progress and hostilities erupted anew.
Traders looked past better-than-expected US ISM services sector PMI data, which rose in May as businesses preemptively placed orders and rebuilt inventories in anticipation of shortages and higher prices because of the Iran war.
