Oil price gains pared as Qatar-US-Iran talks loom

By Scott DiSavino

NEW YORK, Sept 28 (Reuters) - Oil prices edged up on Monday but eased off session highs on expectations that Qatari mediators would hold talks with the US and Iran to find a possible peach deal.

In early trading, prices surged by more than $4 a barrel after US President Donald Trump rejected a peace deal from Iran that would reopen the Strait of Hormuz.

Brent futures rose 81 cents, or 0.8%, to $105.13 a barrel at 12:33 p.m. EDT (1633 GMT). US West Texas Intermediate (WTI) crude rose 29 cents, or 0.3%, to $92.70.

Qatari mediators are expected to hold separate talks with Iranian Foreign Minister Abbas Araqchi in New York and with the US side on Monday or Tuesday, an official briefed on the negotiations told Reuters.

The talks are expected to focus on an amended version of a seven-day proposal that Iran presented last week on the sidelines of the United Nations General Assembly, said the official, who spoke on condition of anonymity. 

Over the weekend, Iran insisted that only diplomacy can solve its conflict with the US and Israel, after US President Donald Trump said he rejected an Iranian proposal to reopen the Strait of Hormuz and end fighting.

Keeping the door to diplomacy open, however, Trump told Axios in a phone interview on Sunday that he expected US negotiators to engage in more talks this week.

Saudi Foreign Minister Prince Faisal bin Farhan, meanwhile, arrived in Washington on Monday for talks with US Secretary of State Marco Rubio, the Saudi state news agency said, amid escalating hostilities between Riyadh and Yemen's Iran-backed Houthis.

MORE MIDDLE EAST CRUDE FLOWING

Crude oil exports from key Middle East producers rebounded in September to 12.8 million bpd, the highest since the war started in February, preliminary data from Kpler showed on Monday, as Saudi Arabia and the United Arab Emirates boosted exports.

The rebound came after a recovery in shipments via the Strait of Hormuz, which were set to hit about 7.4 million bpd this month, the data showed. Saudi Arabia diverted exports from the Red Sea port of Yanbu to its eastern Ras Tanura port following attacks that damaged its East-West pipeline.

"Despite more vessel traffic through the Strait of Hormuz, flows remain below pre-conflict levels, keeping the market undersupplied," UBS analyst Giovanni Staunovo said. 

About a fifth of the world's oil supply — roughly 20 million barrels per day — passed through the Strait of Hormuz before the US and Israel attacked Iran in February.

Saudi Aramco is considering offering discounts on its official selling prices for oil loaded off Oman to compensate buyers for record freight rates, five people familiar with the matter said.

DIESEL PRICES SOARING

The White House is considering regulatory relief that would allow broader sales of red-dyed diesel as part of an effort to bring down soaring prices. Such a move could allow some buyers to avoid the federal fuel tax, according to two people familiar with the discussions.

Washington's recent talk of a possible ban on diesel exports after prices of the fuel hit record highs in recent weeks is widening the gap between US crude oil futures and the global Brent benchmark, a signal that markets expect US refiners to process less crude oil if their diesel output gets stuck at home.

The premium of futures for Brent over WTI was on track to close on Monday at its highest since May for the third time in four trading sessions. That could prompt energy firms to send tankers to the US to pick up more US crude for export to other countries.

Diesel prices have soared due to supply disruptions related to the wars in the Middle East and Ukraine and export bans in Russia and China.

Goldman Sachs said that while Europe and especially Latin America are the key destinations for US diesel exports, a diesel tightening shock would likely quickly spread to the rest of the world.

Moscow imposed a ban on diesel exports to preserve domestic supplies due to refinery disruptions caused by Ukrainian attacks on Russia's energy infrastructure.

On Monday, Ukrainian President Volodymyr Zelenskiy said Ukraine's military has struck Russian oil facilities in the Krasnodar region.

(Reporting by Scott DiSavino in New York, Anushree Mukherjee in London, Mohi Narayan in New Delhi and Florence Tan in Singapore; Additional reporitng by Ahmad Ghaddar in London; Editing by Thomas Derpinghaus, Louise Heavens, Jan Harvey and David Gregorio)