Oil sharply pares gains after report says U.S. and Iran discussing phased deal

Oil prices on Thursday ate into their surge after a media report that the U.S. and Iran were discussing a phased deal that would reopen the Strait of Hormuz and lift an economic blockade on Tehran. 

Crude had jumped earlier, extending gains from the previous session, amid a dent to hopes for diplomatic progress between Washington and Tehran. 

At 12:29 ET (16:29 GMT), Brent crude futures expiring in November, the global benchmark, gained 1.8% to $104.95 a barrel, while U.S. West Texas Intermediate crude futures expiring in November added 2% to $94.01 a barrel. 

U.S. and Iranian negotiators in New York were mulling over a phased path out of war that would involve Tehran reopening of the Strait of Hormuz and Washington lifting its economic blockade against the country, Reuters said on Thursday, citing sources close to the talks.

Brent settled more than 3% higher on Wednesday, while WTI crude climbed nearly 2%. The rally followed Iranian President Masoud Pezeshkian’s address to the United Nations General Assembly, in which he said Iran would not surrender to U.S. pressure while maintaining that Tehran remained open to diplomacy.

His comments came a day after U.S. President Donald Trump warned he could "annihilate" Iran if a deal to end the conflict could not be reached. 

A senior Iranian official told Reuters that Tehran was reviewing Washington’s response to an Iranian proposal to end hostilities, although significant differences remained. Indirect discussions have included the possible reopening of the Strait of Hormuz and the lifting of a U.S. naval blockade on Iran.

Iran’s effective closure of Hormuz has been a key focus for oil markets. The strait handled roughly one-fifth of global oil and liquefied natural gas shipments prior to the start of a joint U.S. and Israeli on Iran in late February. On Wednesday, Iranian security chief Mohsen Rezaei said the waterway would not reopen until Tehran’s conditions were met.

The statements dented hopes for improving Gulf supply, which had been lifted after major producer Saudi Arabia reportedly restarted operations on its east-west pipeline to the Red Sea. Iraq also increased exports.

Along with solid U.S. business activity data on Wednesday, the fresh rise in oil prices back above $100 has driven expectations for more central bank interest rate hikes by the end of the year. The Federal Reserve raised rates last week, partly citing the impact of the energy-price shock.

"Higher oil prices play a role in the hawkish repricing of the Fed’s policy path, and last week’s rate hike, at a time when concerns over sticky inflation still linger," analysts at BCA Research said in a note. 

Elsewhere, U.S. crude inventories rose by 3 million barrels to 426.4 million barrels in the week ended September 18, according to the Energy Information Administration, compared with analysts’ expectations for a 640,000-barrel draw.

Gasoline inventories fell by 1.7 million barrels, while distillate inventories, which include diesel and heating oil, declined by 400,000 barrels.

Meanwhile, a report that the White House was considering a 90-day ban on diesel exports sent U.S. ultra-low-sulfur diesel futures sharply lower on Wednesday.