Oil prices rise as fragile US-Iran talks sustain supply worries

By Anmol Choubey and Trixie Yap

May 12 (Reuters) - Oil prices rose nearly 1% on Tuesday as talks to end the U.S.-Israeli war on Iran appeared fragile, with Tehran's response to a Washington proposal highlighting stark differences that have kept supply concerns alive.

Brent crude futures were up 86 cents, or 0.8%, at $105.07 per barrel, while U.S. West Texas Intermediate CLc1 gained 99 cents, or 1%, to $99.06 at 0411 GMT. Both benchmarks increased nearly 2.8% on Monday.

U.S. President Donald Trump on Monday said the ceasefire with Iran was "on life support," pointing to disagreements over several demands, such as the cessation of hostilities on all fronts, the removal of a U.S. naval blockade, the resumption of Iranian oil sales and compensation for war damage.

Tehran also emphasized its sovereignty over the Strait of Hormuz, through which about a fifth of global oil and liquefied natural gas flows.

"Optimism regarding an imminent (peace) deal seems to be fading again and if we don’t see a deal by the end of May, then upside risks for oil prices are definitely on the table," said DBS Bank energy sector team lead Suvro Sarkar.

Disruptions linked to the near-closure of the strait have prompted producers to curtail exports, with a Reuters survey on Monday showing OPEC oil output in April fell to its lowest level in more than two decades.

"A genuine breakthrough toward a peace deal could trigger a sharp $8-$12 correction, while any escalation or renewed blockade threats would quickly push Brent back toward $115+," said Tim Waterer, chief market analyst at KCM Trade.

Saudi Aramco 2222.SE CEO Amin Nasser on Monday warned that disruptions to oil exports through the strait could delay a return to market stability until 2027, with the loss of about 100 million barrels of oil per week.

Elsewhere on the supply front, U.S. crude stocks were forecast by analysts in a Reuters poll to be down by around 1.7 million barrels in the previous week. EIA/S

The draw comes against "a backdrop of continued strong net waterborne export flows for crude and products, across the next several weeks," said Walt Chancellor, an energy strategist at Macquarie Group.

Meanwhile, market participants were also keeping a close eye on Trump's planned meeting with Chinese President Xi Jinping on Thursday and Friday, after Washington imposed sanctions on three individuals and nine companies for facilitating Iranian oil shipments to China.