Oil slides as US-Iran truce hopes outweigh Houthi attacks on Saudi Arabia

LONDON, Sept 25 (Reuters) - Oil prices fell more than 1% on Friday as markets weighed the possibility of a truce between the US and Iran against concerns that increasing attacks against Saudi Arabia by Houthi fighters could disrupt supply ‌from the key Middle Eastern producer.

Brent was down $1.34, or 1.3%, at $105.26 a barrel at 1215 GMT, while West Texas Intermediate (WTI) ‌was $1.83, or 1.9%, lower at $92.78 a barrel.

For the week so far, Brent has gained 1.5% and WTI has dropped 7.4%.

US and Iranian negotiators in New York are exploring a ​phased path out of war that would involve Tehran reopening the Strait of Hormuz and Washington lifting its economic blockade of Iran, sources close to the talks said this week.

On Thursday, Iranian President Masoud Pezeshkian said it was up to the US to choose when the war will end.

"At this point, neither Iran nor the US has an interest in a more intense, less controllable war," SEB Research's Erik Meyersson said in a note. "The next ‌couple of days could represent a watershed moment ⁠in the Iran War."

Since the conflict began at the end of February, around a fifth of the world's oil and gas shipments have been curtailed.

"Diplomatic hopes are essentially helping oil prices weather the latest military strikes in ⁠the Middle East, with crude trading moderately softer despite the attacks," said Tim Waterer, chief analyst at KCM Trade.

On Thursday, oil prices touched a one-week high, with both contracts rising as much as 5%.

The spread between Brent and WTI is the widest it has been since May at $12.83 a barrel.

Fears of ​a US ​ban on diesel exports that could flood the domestic market are largely responsible ​for the price bifurcation, given that the two benchmarks ‌usually rise and fall in tandem, despite the US contract usually selling at a discount.

The wider spread signals that markets expect US refiners to process less crude if their diesel output gets stuck at home.

That may bring some immediate relief to high domestic diesel prices, which this week hit a record $6.528 a gallon and stirred a political uproar. But the bigger discount for domestic crude futures could be a double-edged omen: an indicator of higher gasoline prices to come, while in the longer term diesel prices could also begin rising again.

Saudi, Turkish and Pakistani military chiefs ‌are to meet to discuss how to support Saudi Arabia under a joint defence ​pact. The Houthis have launched strikes on the Saudi-backed government in Yemen and repeatedly ​fired into Saudi Arabia, disrupting oil flows from the world's ​largest energy exporter.