Brent declined below $90 a barrel on Monday as President Donald Trump said the US and Iran were in talks, fueling optimism about the prospects of de-escalation between the two nations.
Brent futures slid 7.3% at $89.74 a barrel, after falling to as low as $87.55 earlier in the day. West Texas Intermediate fell 6.7% to $83.35, having hit an intraday low of $82.12.
Trump told Axios on Monday that the US is in "very deep talks" with Iran, though he said military action could resume if diplomacy fails.
The US military struck Iran for the 13th straight night on Thursday, with Iran launching its retaliatory attacks across Gulf states. There hasn't been an announcement on fresh US strikes since then.
Oman is conducting talks with Iran, but Qatar, Pakistan and Egypt are also actively involved in the process, Axios reported.
Tehran will halt its attacks as long as the US does the same, a senior Iranian official told Reuters on Sunday.
"While this is the first tangible signal of de-escalation, the reasons behind it are less clear," ING Bank said in a report. "There's little explanation from the US. Also, it hasn't yet led to any meaningful pickup in vessel flows through the Strait of Hormuz."
Despite Monday's sharp pullback, both Brent and WTI remained headed for sizable monthly gains following back-to-back monthly slide. Brent is up 18% on the month, while WTI has gained 20% so far in July.
"We're unlikely to see any recovery (in the volume of cargo ships passing through the Strait of Hormuz) until there's clarity on whether this de-escalation is more permanent and whether vessels can navigate the strait without fear of attack," ING said.
Vessel flows through the Bab el-Mandeb strait remained disrupted after Yemeni Houthis attacked Saudi Arabian oil installations along the Red Sea coast, Reuters reported Monday, citing shipping data from Kpler.
"Houthi claims of attacks on Saudi targets keep a residual risk premium in place," Saxo Bank said in a report.
