Oil settles at multi-week high as US-Iran truce buckles under fresh hostilities

By Shariq Khan and Scott DiSavino

July 8 (Reuters) - Crude oil prices settled nearly 5% higher on Wednesday after U.S. President Donald Trump threatened fresh strikes against Iran, raising concerns that renewed hostilities in the Middle East could put a stop to vessel movements through the Strait of Hormuz.

Brent futures rose $3.86, or 5.2%, to settle at $78.02 a barrel, the highest since June 19. U.S. West Texas Intermediate (WTI) crude rose $3.08, or 4.4%, to $73.52, the highest since June 22.

Trump said an interim deal signed last month to end the war with Iran was "over" and that the United States was likely to launch new strikes on Wednesday night following Iranian attacks on U.S. bases in the Gulf and tankers in the Strait of Hormuz.

Trump later ruled out the restart of full-fledged war with Iran, pulling oil benchmarks lower from the session's highest gains of near 9%.

Still, the latest flare up in tensions has likely put a ceiling on the number of vessels willing to pass the Strait of Hormuz, analysts from RBC Capital Markets said in a note.

A fifth of global oil supplies moved through the Strait before the Iran war began on February 28 after U.S.-Israeli airstrikes against Tehran. Iran has maintained a chokehold on vessel movements through the busy waterway since then, forcing other Middle Eastern oil producers to cut millions of barrels of oil production due to their inability to export at the same rate as before.

"Fundamentally, the events of the last few days significantly weaken any confidence that the current 60-day truce can still evolve into a permanent peace agreement," said Jorge Leon, head of geopolitical analysis at consultancy Rystad Energy.

DIESEL LEADS THE WAY

U.S. ultra-low sulfur diesel futures soared by over 14% in intraday trade after Russia introduced a ban on diesel exports on Wednesday as part of a raft of measures to support the domestic fuel market after systematic Ukrainian drone attacks on oil refineries triggered gasoline shortages and price spikes.

Ukrainian drones struck three Russian oil refineries, Russian tankers on the Sea of Azov, and pipeline pumping stations, Ukrainian and Russian officials said on Wednesday, in a major night of strikes ranging from the Ukrainian border to the Urals mountains.

That diesel price spike boosted the U.S. 3-2-1 crack spread, a key benchmark for refining profit margins, to a record high, according to LSEG data going back to 2001.

U.S. distillate fuel stocks, which include diesel and heating oil, fell by nearly 5 million barrels last week due to strong domestic demand and high exports, data from the U.S. Energy Information Administration showed on Wednesday.

Meanwhile, U.S. crude stocks posted a surprise increase last week, the data showed. [EIA/S]

(Reporting by Shariq Khan, Anushree Mukherjee, Yuka Obayashi, and Jeslyn Lerh;Additional reporting by Seher Dareen and Florence Tan and Scott DiSavino;Editing by Mark Potter, Will Dunham, Nick Zieminski, Sanjeev Miglani and Chizu Nomiyama )