Oil falls sharply on Middle East peace deal hopes

* Oil prices drop 2%, extending previous session's heavy losses

* Al ​Arabiya reports ⁠possible easing of U.S. blockade

* Analysts warn ​prices could rebound if conflict escalates again (Recasts, updates prices and changes dateline to London)

LONDON, May 7 (Reuters) - ​Oil ‌prices extended losses on Thursday, sliding more than 2% on renewed hopes for a peace deal that ⁠could bring a gradual reopening of the Strait of ⁠Hormuz.

Brent crude futures fell $2.16, or ​2.13%, to $99.11 a barrel by 0732 GMT. U.S. West Texas Intermediate lost $2, or 2.1%, to $93.08.

Both benchmarks had slumped by more than 7% on Wednesday, hitting two-week lows on optimism over a possible ​end to ‌the Middle East war.

A report from Saudi Arabia's Al Arabiya news agency on Thursday said that understandings have been reached to ease the U.S. blockade of Iranian ports in exchange for a gradual reopening of the Strait of Hormuz. Reuters could not immediately verify the report.

Iran ​had said on Wednesday that it was reviewing a U.S. peace proposal that sources said would ‌formally end the war while leaving unresolved the key U.S. demands that Iran suspend its nuclear programme and reopen the Strait of ‌Hormuz.

"From a broader perspective, oil markets have remained stuck between diplomacy and disruption for more than two months, with investors' emotions being manipulated by headlines almost daily," said Priyanka Sachdeva, senior market ​analyst at Phillip Nova.

"If a formal deal eventually materialises, oil prices could witness a free fall as geopolitical premiums ‌rapidly evaporate from the market. However, any fresh signs of attacks on oil infrastructure or escalation in the Middle East could easily trigger another parabolic spike in crude prices."

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 Chinese counterpart ​Xi Jinping will discuss ​the subject when they meet next week.

"While peace negotiations are ‌likely to continue at least until next week's U.S.-China summit, the outlook beyond that remains uncertain," said Hiroyuki Kikukawa, chief strategist of Nissan Securities Investment.