But two key benchmarks are still on track for a massive 21% monthly gain: File Image/Pixabay

Saudi Arabia proposing a naval coalition to protect trade routes in the Strait of Hormuz and the Red Sea from Iranian attacks not only signaled a possible turning point in the five month old U.S./Iran war, it rekindled optimism within the oil investment community – and caused crude on Thursday to shed  about 2 percent.

The Saudi Defense Ministry confirmed that over 40 countries participated in a meeting to discuss “strengthening maritime defence cooperation and unifying efforts to protect the security of maritime passages.”

The coalition would include Saudi Arabia, Kuwait, Qatar and Bahrain from the Gulf Cooperation Council, as well as Pakistan, Turkey, Egypt and Jordan.

This development reversed price gains triggered by a heavy wave of U.S. strikes in Iran in response to attacks on American forces in Jordan, a two-hour campaign that targeted military command centers, missile and drone facilities, coastal surveillance and defence sites, and maritime capabilities.

Brent dropped nearly 2 percent to settle at $89.03 per barrel, and West Texas Intermediate declined about 1 percent to settle at $83.59 per barrel; both benchmarks were on track for a 21 percent monthly gain, the biggest since March.

John Kilduff, founding partner at Again Capital, said of the efforts to block the Hormuz as well as the Bab el Mandeb passage in the Red Sea, "There is this sense that there is a lot of supply waiting to hit market once all of this is resolved, and that is a weight against any kind of dramatic price rise."

Tim Waterer, chief market analyst at KCM Trade, offered a different perspective:  "Until safe passage through the Strait of Hormuz is no longer a gamble, the risk premium in oil is not going anywhere – hope for diplomacy is welcome, but the market is pricing in the reality of ongoing strikes."

In other war-related oil news on Thursday, Saudi Arabia’s finance ministry disclosed that the kingdom’s quarterly budget deficit shrank by nearly three-quarters in the second quarter: a 34.3-billion-riyal—or $9.1-billion—shortfall for the three months through June, down from 125.7 billion riyals in the first quarter.

Oil revenue rose 28 percent from the previous quarter due to escalating crude prices, and spending fell 3.5 percent; meanwhile, the oil sector contracted almost 25 percent during the quarter.