Oil prices were up about $5 a barrel on Monday after Iran's Tasnim news agency reported that Tehran is halting indirect negotiations with the US and plans are being made for Iranian forces and their allies to completely block the Strait of Hormuz and take action elsewhere, including another key shipping route.
Iran and the US traded strikes in recent days and Israel ordered troops to move further into Lebanon in its battle with the Tehran-backed Hezbollah militant group.
Brent crude futures were up $4.80, or 5.2 per cent to $95.92 a barrel at 13:17 EDT (17:17 GMT) while US crude futures rose $5.46, or 6.2 per cent, to $92.82 a barrel.
Both benchmarks pared gains after US President Donald Trump shrugged off the suspension of indirect talks with Iran in an interview with CNBC on Monday, saying he did not care if they were over.
Brent and WTI fell around 19 per cent and 17 per cent, respectively, last month, marking both contracts' biggest monthly drops in absolute terms since March 2020, when the Covid-19 pandemic slashed energy demand.
Iranian state TV said separately on Monday that a ceasefire agreed between Iran and the US in early April is very likely to end if Israel continues to attack Hezbollah.
Esmaeil Baghaei, spokesperson for Iran's foreign ministry, said the delay in the diplomatic process to end the war can be explained by a lack of trust, Washington's contradictory positions and Israel's attacks on Lebanon.
"It just seems that both sides are in different worlds," said Andrew Lipow, president of Lipow Oil Associates. "The longer the conflict continues, the lower commercial inventories will get...at which time prices spike. We are only a month or two away from that," he said.
The escalation poses a further obstacle to hopes of a swift end to the crisis, which has effectively shut down the Strait of Hormuz, a vital global supply route for oil and liquefied natural gas. An Axios report said on social media on Friday that Iran had dropped more mines in the strait last week.
"Even if an agreement is reached, it won't deliver a flood of supply," IG analyst Tony Sycamore said in a note, referring to the issues with mines in the waterway.
Shipping executives meeting in Athens on Monday said any peace deal would need to offer clear rules allowing vessels to resume normal business through the Strait of Hormuz.
Alongside oil supply concerns, economic data from China over the weekend that showed stalling factory activity added to fears the world's second-largest economy is losing momentum. Saudi Arabia is likely to cut its official selling prices for crude oil to Asia in July for a second consecutive month, a Reuters survey showed.
Russia's government, meanwhile, intends to increase fuel supplies from Belarus and tighten oversight over exports of gasoline and diesel to meet domestic fuel demand, the RBC news outlet reported on Monday, citing two sources familiar with the matter.
A complete ban on gasoline exports for two months, including under some inter-governmental agreements, is under discussion, the report said.
Kazakhstan has restored its oil production to 290,000 tonnes per day following earlier production losses at the Tengiz oilfield, the country's largest, Energy Minister Erlan Akkenzhenov said on Monday.
On Sunday, Goldman Sachs said weak oil demand in China and Europe poses a major downside risk to its fourth-quarter Brent crude forecast of $90 a barrel and WTI forecast of $83, although supply disruptions in the Middle East could still push prices higher.
Global stocks clung to record highs on Monday as strong corporate results, fuelled in part by optimism about artificial intelligence, outweighed concerns over the rising US-Iran tensions.
(Reporting by Siddharth Cavale and Shadia Nasralla; Additional reporting by Colleen Howe and Sam Li; Editing by Susan Fenton, Nick Zieminski and Paul Simao)