Oil prices hovered around a one-week low on Monday after the U.S. and Iran paused strikes over the weekend following two weeks of attacks, raising hopes of a diplomatic solution that would de-escalate the conflict and allow shipping to resume in the Strait of Hormuz.

Brent crude futures fell $5.85, or around 6%, to $90.93 a barrel by 1309 GMT. They fell as low as 9.5% earlier in the session to $87.55 a barrel. US West Texas Intermediate crude was at $84.33 a barrel, down $4.98, or around 5.6% and going as low as 8% earlier in the day to $82.12 a barrel.

Both contracts were trading at their lowest levels since July 20 earlier in the session. Brent had reached $100 per barrel as the conflict, which reduced oil shipments via the Strait of Hormuz, spilled over to the Red Sea, hindering exports from the world's top exporter, Saudi Arabia, via the Bab el-Mandeb strait to Asia. The U.S. ambassador to the United Nations, Mike Waltz, told "Fox News Sunday" and other U.S. media that President Donald Trump had decided to pause U.S. attacks to allow more time for diplomacy.

"The market seems to be forever seeking good news from an arena that really is not providing any," said PVM analyst John Evans.

"A stay of military strikes might seem an improvement, but it does not come with any guarantees that oil will soon flow from the area... prices will only continue lower if high prices once again dent demand, not questionable mini-ceasefires."

Prices pared losses throughout the day after Saudi Arabia's air defences intercepted and destroyed drones launched from Iraq that attempted to target oil facilities in the kingdom's Eastern Province and Riyadh and the country's foreign ministry said they held a right to respond to the sources of "the aggression." Yemen's Iran-aligned Houthis also said they targeted a number of sensitive crude oil supply and transport sites linking eastern Saudi Arabia to the Red Sea city of Yanbu.

Outlook uncertain with no signed framework

"There's no signed framework, no verification mechanism and no agreed timeline, as far as what we can see is it looks like the two sides have stopped shooting since Friday," said Ole Hvalbye, market analyst at SEB Research. Fewer than 10 commodity vessels passed through the Strait of Hormuz daily during the weekend, shipping data from Kpler showed.

"Flows fell to something like 15% of pre-war levels, against a normal run rate of roughly 20 million barrels a day of crude, condensate and products. A political pause doesn't put a single extra barrel on the water right here and now," Hvalbye added.

In addition, ship traffic through the Bab el-Mandeb strait fell on Sunday after Yemeni Houthis attacked Saudi oil installations along the Red Sea coast, although a third Chinese supertanker exited via the Bab el-Mandeb strait.

Elsewhere, Kazakhstan, among the world's 10 biggest oil producers, has more than halved its daily oil output following the closure of the main exporting terminal in Russia's Black Sea over drone attacks, an industry source said on Monday. The energy ministry later said the Caspian Pipeline Consortium's Black Sea terminal had resumed oil loadings.