Oil prices fall as diplomacy hopes outweigh escalation fears in Middle East war

By Georgina McCartney

HOUSTON, Oct 29 (Reuters) - Oil prices fell on Thursday in a choppy session as hopes for peace talks between the US and Iran offset some concerns over Middle East supply disruptions from an escalating regional conflict.

Brent crude futures were down 40 cents, or 0.35%, to $114.92 a barrel by 1:35 p.m. EDT. US West Texas Intermediate (WTI) crude futures were down 66 cents, or 0.64%, at $102.12.

Both benchmarks fell by more than $2 a barrel earlier in the session, unwinding some of Brent's 1.3% and WTI's 3% Wednesday gains. 

The Yemeni army targeted Saudi Aramco in a massive wave of missile attacks, according to a media report. 

Those reports of a new spate of attacks helped oil recoup some losses later in the session, said John Kilduff, partner at Again Capital. 

Earlier, US Vice President JD Vance sought to revive peace negotiations by sending a letter to Mohsen Rezaei, the head of Iran's Supreme National Security Council, the Wall Street Journal said on Wednesday, citing US officials and people familiar with the matter.

"Oil prices are under pressure today amid renewed diplomatic efforts to de-escalate the conflict in the Middle East," UBS analyst Giovanni Staunovo said. 

Qatari mediators have presented Iran with a new draft deal to end the war, an official briefed on the negotiations said, but a senior Iranian official dismissed it as unacceptable ideas that did not amount to an offer.

Iran's foreign minister said on Wednesday Tehran continued to give diplomacy a chance to succeed and flagged the possibility of completing its seven-day plan in less than a week if adopted.

Concerns over intensified attacks by Yemen's Iran-aligned Houthis and fears the Trump administration may launch an attack on Iran following the US midterm elections set for November 3 limited the decline.

The Saudi-led coalition fighting the Houthis said it had destroyed a ballistic missile fired by the group towards the kingdom's eastern region early on Thursday, as hostilities between the two sides show no signs of abating.

"The Saudi-led coalition's interception of another Houthi missile early Thursday shows that threats to regional infrastructure remain active despite the renewed push for negotiations," Gelber and Associates analysts said in a note on Thursday. 

The Houthis attacked Aden's airport on Wednesday, Yemeni government forces said.

On Wednesday, the Houthis said they hit Saudi Arabia's biggest oil refinery with a missile, stepping up strikes against the world's second-largest crude producer after the US.

Meanwhile, Iran's Revolutionary Guards said that three tankers hit sea mines, exploded and caught fire while attempting to use an unauthorised route south of the Strait of Hormuz over the past 24 hours.

Some expectations of rising crude and diesel production from Russia also kept a lid on prices.

"There are mixed signals coming from Russia about what they are going to do about fulfilling their diesel promise to the US, that is helping keep prices aloft," Kilduff said. 

There have been no further confirmed attacks on Russian refining infrastructure since the October 15 strike on the Ryazan refinery, JPMorgan analysts said in a note late on Wednesday. "The silence has allowed Russian refinery runs to rebound by 350,000 barrels a day last week, to 4 million barrels a day."  

US crude and distillate inventories fell due to higher demand, while gasoline stockpiles rose in the week ended October 23, the Energy Information Administration said on Wednesday. However, analysts at ship-tracking firm Kpler highlighted that export figures reported by the EIA were higher than their own tracking systems. [EIA/S]

(Additional reporting Ahmad Ghaddar and Seher Dareen in London, Trixie Yapp and Yuka Obayashi; Editing by Kirsten Donovan, Andrea Ricci, Paul Simao and Nick Zieminski)