Oil prices halted their gains on Tuesday as markets weighed reports of mediation efforts between the United States and Iran against new attacks between the two countries and threats of a naval blockade in the Red Sea by Yemen's Houthis.

Brent crude futures fell 96 cents, or 1.1%, to $88.26 per barrel. U.S. West Texas Intermediate crude fell 73 cents, or 0.9%, to $82.50 per barrel, while the most actively traded contract for September delivery dropped 57 cents, or 0.7%, to $81.91 per barrel.

ING bank analysts said in a note, referring to the interim agreement reached in June: "There is some hope for de-escalation between the US and Iran, and reports indicate mediators are proposing a ten-day ceasefire, which could get the memorandum of understanding back on track."

However, it will not be easy, as fundamental differences remain between Washington and Tehran, while U.S. President Donald Trump warned of retaliation after the killing of a number of American soldiers, according to ING.

An Iranian official said Tehran received a proposal from mediators for a ten-day ceasefire in an attempt to salvage the agreement signed on June 17, which aimed to pave the way for a permanent deal to end the war that began on February 28 with US-Israeli attacks on Iran.

The United Kingdom Maritime Trade Operations agency reported on Tuesday that an oil tanker in the Strait of Hormuz was hit by an unknown projectile, forcing its crew to abandon the ship and take to a lifeboat. Ship traffic through the strait also declined amid increasing caution following the new attacks between the United States and Iran.

Tim Waterer, senior market analyst at KCM Trade, said: "The Houthis' threats of a naval blockade on Saudi Arabia are dangerous because they increase the risk of disrupting oil supplies from another major oil-exporting country." The Houthis' direction in Yemen to close the Bab el-Mandeb strait would affect one of the world's most important oil shipping routes, potentially leading to a new rise in crude oil prices, disruption of fuel supplies, and exacerbating pressures on the global economy.

Richard Brons, from consulting firm Energy Aspects, said: "After last week's oil price rise amid escalating tensions between the US and Iran, and the resulting slowdown in oil transit through the Strait of Hormuz, traders are looking for catalysts to justify further gains."

Bab el-Mandeb crossing. He added: "Certainly, the Houthis' resumption of naval attacks and their effective closure of the Bab el-Mandeb crossing would be among the catalysts." Oil prices rose by less than 1% after the Houthis' statement, reaching around $89 per barrel. Hopes for resuming peace talks between Iran and the US had weighed on prices earlier. Oil futures peaked at $126 this year, below the all-time high of $147 in 2008.

The Bab el-Mandeb strait connects the Red Sea to the Gulf of Aden, and is a key waterway for crude oil and fuel shipments between the Middle East, Europe, and Asia. Since the Houthis began attacks on ships in 2023, many vessels have rerouted around Africa, increasing global trade costs and delays.

A full closure would have the greatest immediate impact on Saudi crude oil exports from the Yanbu port on the Red Sea. Matt Smith, commodity research director at Kpler, said Asian refineries receiving these barrels could face delays of up to about a month, as oil tankers would have to sail around the Cape of Good Hope.

Smith added: "The impact will be huge in the first month, and the biggest impact will be on Saudi oil flows." Brons estimated that more than 3 million barrels per day of Saudi crude currently shipped via the Red Sea to Asia could be forced to take much longer routes.

This disruption would cause logistical bottlenecks, as fully loaded supertankers cannot transit the Suez Canal, while the capacity of Egypt's SUMED pipeline, which connects the Red Sea to the Mediterranean, is limited.

Kpler data shows the kingdom shipped an average of more than 4.5 million barrels per day of crude and fuel from Yanbu since April, with about 70% bound for Asia. John Paisie, president of consulting firm Stratas Advisors, said the impact would go far beyond oil markets.

He added: "If oil flows through the Red Sea effectively stop, it would negatively impact oil prices as well as refined product prices. This would weaken the entire global economy and could eventually lead to a global recession."

Analysts expected the immediate oil market reaction to be another rise in crude prices, with refineries competing for available supplies. Paisie noted that oil prices could return to above $115-120 per barrel, while shipping and insurance costs would also rise as vessels take longer routes around Africa.

European diesel refining margins rose to a record high above $65 per barrel on Friday and remained near that level on Monday. Diesel and jet fuel supplies from Asia and the Middle East to Europe typically pass through the Bab el-Mandeb strait.

Meanwhile, a poll showed U.S. crude oil inventories were expected to have fallen last week alongside a decline in gasoline inventories, while distillate stockpiles likely rose.

At the same time, U.S. crude oil inventories in the Strategic Petroleum Reserve fell by about 5.1 million barrels to 311.4 million barrels last week, the lowest level since March 1983, according to U.S. Department of Energy data.

This decline is part of a U.S. agreement to release 172 million barrels from the reserve. Since the start of the US-Israeli war on Iran at the end of February, Strategic Petroleum Reserve stocks have decreased by 104.04 million barrels as of July 17.

Total U.S. inventories, including commercial and SPR stocks, fell by 129 million barrels to 726.2 million barrels as of July 10, the lowest level since 1984, with the latest data through the end of last week expected to be released on Wednesday.