Aug 26 (Reuters) - Oil prices fell more than $2 a barrel to a more than two-week low on Wednesday as talks between Iran and Oman revived hopes that the Strait of Hormuz could reopen and remove shipping constraints affecting supply in the key Middle East region.
Brent crude futures fell $2.73, or 3.08%, to $85.85 a barrel by 1012 GMT. West Texas Intermediate crude futures were down $2.21, or 2.68%, at $80.15.
Both benchmarks fell to their lowest levels since August 10 earlier in the session.
"It's renewed focus on the discussion between Iran and Oman regarding a deal for transiting oil and other petrochemicals through the Strait of Hormuz. So that sort of creates some optimism," said Bjarne Schieldrop, chief analyst, commodities, at SEB Research.
Iran has held new talks with neighbouring Oman on management of the Strait of Hormuz, blockaded over nearly six months of conflict, with Oman's foreign minister saying he was hopeful a temporary corridor through the waterway could be announced soon.
The two countries have held intermittent discussions for weeks about oversight of the vital waterway, which carried about a fifth of global oil and liquefied natural gas shipments before the U.S.-Israeli war with Iran began in February.
The two countries said on Tuesday that they discussed "a joint temporary navigational corridor" through the strait and agreed to clear it of mines.
"The market has moved from pricing a high probability of prolonged disruption and renewed escalation towards pricing partial reopening, negotiated shipping arrangements and a lower risk of renewed military confrontation," said Saxo Bank head of commodity strategy Ole Hansen.
"A credible agreement that rapidly restores Hormuz traffic could remove another layer of geopolitical premium."
While the discussions continue, ship traffic through Hormuz remains subdued. Only five commodity vessels transited the waterway on Tuesday, preliminary data from shiptracker Kpler showed, down from the 10-day average of 15 and well below pre-war levels.
Two supertankers carrying 4 million barrels of Saudi crude are bound for China after loading the cargoes via ship-to-ship transfers off Oman, shipping data showed on Wednesday.
Talks on an overall end to the conflict also continue. Pakistan and Iran made "significant progress" in talks that focused on the U.S.-Israeli war on Iran and a path to peace, Pakistan's interior minister said on Tuesday, at the end of a visit to Tehran.
On Monday, Washington expanded sanctions aimed at cutting off Iran's economic lifeline, threatening to punish countries that continue to do business with Tehran, though it said it would not impose penalties immediately.
Reporting by Anushree Mukherjee in Bengaluru, Yuka Obayashi in Tokyo and Siyi Liu in Singapore; Editing by Sonali Paul, Christian Schmollinger, Elaine Hardcastle
