Crude oil prices fell sharply Monday as the presidents of the U.S. and Iran signalled they are open to a diplomatic solution to the conflict that has disrupted energy markets for eight months.
U.S. West Texas Intermediate futures shed 7.4% to close at $96.46 a barrel, the biggest daily loss since July 27. Brent crude, the international benchmark, lost 7.6% to settle at $104.77 a barrel.
President Donald Trump told reporters Monday that Iran wants to "make a deal and that could happen." U.S. Secretary of State Marco Rubio said over the weekend that Trump prefers not to use military force against Iran and would like to resolve the conflict diplomatically.
Trump has previously said that he will not attack Iran before the U.S. midterms. But the oil market had priced in the risk of a major military escalation after the elections, gaining more than 10% in October.
The oil market has sold off during previous phases of the war on rumors of a possible settlement, only for the conflict to subsequently escalate and spike prices again.
Trump "hasn't made a decision" on whether to strike Iran again, Rubio told reporters.
"What the president expresses to you is incredible confidence that if we needed to do something militarily, we would have the ability to do it," the secretary of State said. "But we would prefer to do it peacefully."
Iran's President Masoud Pezeshkian said Tehran is seeking to resolve problems through dialogue, according to state-owned Islamic Republic News Agency. Iran's Supreme Leader Ayatollah Mojtaba Khamenei has granted the government certain authorities to do this, Pezeshkian said.
Iran's foreign minister, Abbas Araghchi, said an agreement with the U.S. is possible if Washington "demonstrates goodwill" and is "truly seeking a peaceful solution," according to IRNA.
Araghchi said mediators are discussing the proposal Iran made during the United Nations General Assembly in September. Tehran expects the U.S. to lift sanctions, reduce its military presence in the region to previous levels and lift the blockade, the foreign minister said.
But Khamenei on Saturday called for Tehran's armed forces to meet "any level or type of threat" with "an immediate, impactful, and geographically unrestricted response."
Reports about diplomatic efforts will have a big impact on crude oil prices because much of the market's recent gains were risk premium in anticipation of a possible escalation, according to Ryan McKay, director of commodity strategy at TD Securities.
"With that said, so long as there is no concrete conclusion to the war, and tanker and Houthi attacks remain prevalent, we do not anticipate a complete erosion of the risk premium via diplomacy headlines alone," McKay said.
— CNBC's Lim Hui Jie contributed to this report.