U.S. and Iran in negotiations as bombing pause raises oil market concerns

By Bo Erickson, Nayera Abdallah and Elwely Elwelly

WASHINGTON/DUBAI, July 27 (Reuters) – President Donald Trump said on Monday that the United States was having "good talks" with Iran and there was a chance of a deal over their conflict, but warned U.S. strikes would resume if the negotiations failed to deliver.

Washington abruptly suspended a two-week campaign of air strikes against Iran on Saturday in the president's latest strategic U-turn in the five-month-old conflict.

"We're talking right now," Trump told reporters aboard Air Force One. "We're having good talks… I think there's a good chance that something could happen, and if it does, good, if it doesn't, we go back to doing what we were doing two days ago."

In contrast to the president's seemingly optimistic remarks, Tehran appeared to quickly test the pause in the U.S. military campaign, with Saudi Arabia, Jordan and Iraq reporting drone attacks on Monday.

Saudi Arabia said it shot down drones aimed at petroleum targets, including in the capital Riyadh. It said the drones had been launched from Iraq by Iran-backed armed groups, and it reserved the right to respond.

Separately, Iran's Houthi allies in Yemen said they had targeted the 1,200-km (745-mile) East-West Pipeline carrying oil to Saudi Arabia's main Red Sea port of Yanbu, in retaliation for what they said were Saudi drone incursions into Yemeni airspace.

Iran has said it is not seeking to resume peace talks with the U.S., although it would pause its own attacks for as long as Trump's self-imposed ceasefire continues.

Tehran also said it was still in control of the contested Strait of Hormuz, the key waterway for global energy supplies, which Trump has demanded vessels be able to pass through freely.

The end of the U.S. campaign after 13 successive nights of intensifying bombing and Trump's remarks on talks with Tehran sent oil prices tumbling. Brent crude, which had briefly ticked above $100 a barrel last week for the first time since May, fell around 8.2% on Monday to just below $89, having fallen as low as $87.55.

Trump's decision to suspend the campaign reflected advice from his military that the bombing had reached the limits of what it could achieve, according to a U.S. official and several U.S. media reports.

The U.S. official told Reuters that military commanders had advised the president they were running out of targets. The chairman of the Joint Chiefs of Staff, General Dan Caine, had expressed concern over the depletion of air munitions, the official said.

The U.S. ambassador to the United Nations, Mike Waltz, said on Sunday that Trump had paused the campaign to allow room for negotiations. Trump, Secretary of State Marco Rubio and other U.S. officials have described Iran as "begging for a deal."

But Iran's Foreign Ministry spokesman Esmail Baghaei said in a televised press conference on Monday that Iran had not asked to resume peace talks with the United States.

Messages were still being passed between the sides through mediators and Iran had not forsaken diplomacy, but "reports about Iran requesting negotiations with the U.S. are fabricated," Baghaei said. "This is not in our DNA."

Several Iranian state media outlets cited an "informed source" as saying that Iran had turned around six "offending ships" on Monday morning that had attempted to cross the Strait of Hormuz without its permission.

Trump launched his renewed bombing campaign to punish Iran after Tehran fired on ships using a route promoted by the United States, which told vessels to sail close to the coast of Oman.

Iran says ships may pass only through a Hormuz channel that runs closer to its own coast, which it controls and where it intends to impose transit fees.

The two weeks of renewed U.S. bombing killed scores of people in Iran and destroyed bridges and tunnels across the south as well as military targets.

Four U.S. service members were killed by Iran's return fire against U.S. bases in neighboring Arab states. Iran also struck civilian infrastructure in Gulf countries in what it said was retaliation for U.S. strikes on civilian targets.

The U.S. bombing halt leaves no clear indication of what leverage Washington can exert to achieve Trump's aim to break Iran's grip on the strait.

Washington and Tehran reached an agreement in June on a framework for talks meant to take place by the end of August to resolve major issues such as Iran's nuclear program.

But the sides have disputed the meaning of the memorandum's language about the strait, with Washington insisting it requires Tehran to allow free travel while Iran says it grants it the authority to supervise transit.