* Oil prices drop 3%, extending previous session's heavy

losses

* Al Arabiya reports possible easing of US blockade

* Analysts warn prices could rebound if conflict

escalates again

* Iran's oil production likely down by around 400,000 bpd

- US energy secretary Chris Wright

(Changes dateline, byline, updates prices, adds analyst

comment, bullet)

By Siddharth Cavale

NEW YORK, May 7 (Reuters) - Oil prices fell 3% on

Thursday, bouncing off session lows in volatile trade but

staying down about 3%, keeping Brent below $100 a barrel on

hopes that a U.S.-Iran peace deal could bring a gradual

reopening of the Strait of Hormuz.

Brent crude futures were down $3.21, or 3.17%, at

$98.06 a barrel at 11:21 a.m. ET (1521 GMT). U.S. West Texas

Intermediate declined $3.15, or around 3.31%, at $91.93.

Trading was volatile, with both benchmarks trading in a

range of up 1% to down 5.5% from the previous close. Both

benchmarks slumped more than 7% on Wednesday, hitting two-week

lows on optimism over a possible end to the Middle East

conflict.

The U.S. and Iran are edging toward a limited, temporary

agreement to halt their war, sources and officials said on

Thursday, with a draft framework that would stop the fighting

but leave the most contentious issues unresolved and center on a

short-term memorandum rather than a comprehensive peace deal.

Analysts also flagged a report from Saudi Arabia's Al

Arabiya news channel that said understandings have been reached

to ease the U.S. blockade in exchange for a gradual reopening of

the Strait of Hormuz, and another by Israel's Channel 12 that

said Iran had agreed to transfer its stockpile of 60% enriched

uranium to a third country. Reuters could not immediately verify

either report.

Skepticism, however, remained over their credibility.

"It remains far from clear that there is any material

movement toward reopening the Strait of Hormuz, or if we are

instead stuck in a rebranded 'ceasefire with no oil' purgatory

for the time being," RBC analyst Helima Croft wrote in a note.

SEB Research analyst Ole Hvalbye said a confirmed deal would

probably take Brent back into the $80-$90 price range quickly

but a breakdown in talks or a Trump pivot back to strikes,

however, would immediately push prices north of $120 a barrel.

While a signed memorandum of understanding might reduce the

risk premium in the paper market, it would not have much

immediate impact on the high premiums for physical crudes, he

said, adding that it would take weeks or months for the market

to normalise after an agreement.

On the supply front, Iran appears to have cut back oil

production by 400,000 barrels per day and is likely to reduce it

further as its storage units fill, U.S. Energy Secretary Chris

Wright said in an interview with Fox News on Thursday.

A Chinese-owned oil products tanker was attacked near the Strait

of Hormuz on Monday, Chinese media outlet Caixin reported,

marking the first time a Chinese oil vessel has been attacked.

Earlier in the week, U.S. Treasury Secretary Scott Bessent

urged China to intensify its diplomatic efforts to persuade Iran

to open the Strait of Hormuz to international shipping, adding

that President Donald Trump and his Chinese counterpart Xi

Jinping will discuss the subject when they meet next week.

Fallout from the Iran war was a main topic at the Southeast

Asian bloc ASEAN meetings on Thursday, with renewed calls for a

united front in the face of serious challenges for its fuel

import-dependent economies. ASEAN leaders will on Friday call

for good-faith negotiations between the U.S. and Iran and a halt

in hostilities, according to a working draft of a statement seen

by Reuters.