Oil prices sink, shrugging off renewed Middle East fighting

Oil prices fell on Wednesday, shrugging off a new wave of U.S. attacks against Iranian military installations that aimed to limit Tehran's ability to strike shipping in the Strait of Hormuz and taking heart from a smaller-than-expected drop in U.S. crude oil inventories.

Brent futures fell $1.11, or 1.31%, to $83.62 a barrel at 10:43 a.m. CDT (1543 GMT). West Texas Intermediate futures lost 81 cents, or 1.02%, to $78.53 a barrel.

The U.S. Energy Information Administration reported a 1.7-million-barrel drop in U.S. crude inventory last week, less than a forecast draw of 2.6 million barrels.

"There seems to be a sense that we've seen this movie before," said Phil Flynn, senior analyst with Price Futures Group, referring to hostilities in the Middle East.

"There's a sense in that EIA report the supplies instead of evaporating are stabilizing," he added.

Washington had earlier reimposed a naval blockade of Iranian ports and launched overnight strikes, prompting Iran's Islamic Revolutionary Guard Corps to threaten to close "all other export corridors that benefit the U.S. and its allies".

Oil prices settled up 2% at a one-month high on Tuesday as attacks exacerbated a supply disruption in the Strait of Hormuz, through which about a fifth of the world's oil and liquefied natural gas passed prior to the war's outbreak.

The hostilities between Iran and the U.S. reignited last week, fraying an already fragile truce reached in June after several months of fighting.

Late on Tuesday, the U.S. military said it had hit dozens of military targets near the strategic waterway and Iranian coastal areas in strikes lasting seven hours.

In response, Iran's Islamic Revolutionary Guard Corps said on Wednesday it had struck U.S. military targets in the region, including in Bahrain, Kuwait and Jordan.

The U.S. military said its fresh strikes on Wednesday against Iran's coastal defence systems and cruise missile storage and launch sites were "designed to further degrade military capabilities Iranian forces have used to attack commercial shipping in the Strait of Hormuz."

Analysts have said Iran has been signalling it may use its Houthi allies in Yemen to shut the Bab el-Mandeb gateway to the Red Sea, opening a new front against Washington and putting two of the world's most vital energy arteries at risk.

Further strengthening oil prices was a U.S. naval blockade of ships coming and going to Iranian ports, said UBS analyst Giovanni Staunovo, adding that Iranian crude exports were around 1.5 million to 2 million barrels per day in the last two weeks.