Updates prices, adds comment

By Erwin Seba

HOUSTON, May 8 (Reuters) - Brent crude futures jumped as much as 3% on Friday, a day after the U.S. and Iran traded air strikes, but pared gains as traders hoped for a longer pause in the fighting that has shut shipping in the Strait of Hormuz.

Brent crude futures LCOc1 settled at $101.29 a barrel, up $1.23 or 1.23%, after rising as much as 3% during the session. U.S. West Texas Intermediate (WTI) futures CLc1 finished at $95.42 a barrel, up 61 cents, or 0.64%.

Both contracts were settled with weekly declines of more than 6%.

"We're treading water here, rightfully so," said John Kilduff, partner with Again Capital. "We're on the cusp of a breakthrough in negotiations or we're on the cusp of a renewal of the fighting. We've been here a lot."

"There is a sense in the market that there is going to be an agreement and we'll get the next phase which would be 30 days to hammer out an agreement (between Iran and the U.S.)," Kilduff said.

Throughout the day, traders felt like they had been swatted back and forth like a tennis ball.

"We're still playing the headline-o-rama game," said Phil Flynn, senior analyst with Price Futures Group. "Ship movement in the Persian Gulf is going about as well as can be expected. We're kind of working around the edges."

U.S. and Iranian forces clashed in the Gulf, and the UAE came under renewed attack as Washington awaited a response from Tehran to its proposal to end the conflict, which began with joint U.S.-Israeli airstrikes across Iran on February 28.

U.S. President Donald Trump later on Thursday told reporters the ceasefire was still in effect and sought to play down the exchange.

However, on Friday, Trump renewed an ultimatum demanding Iran give up its nuclear ambitions.

"How quickly can supply be returned from Gulf states, what will the state of inventories be as we approach peak gasoline season, and what sanctions would look like post-settlement are all worthy of thought. But none can be addressed until there is a long-term solution to hostilities," said PVM Oil Associates analyst John Evans.

"The U.S. administration continues to oversell the prospects of a thaw, and an optimism-biased market buys into it," said Vandana Hari, founder of oil market analysis firm Vanda Insights.

"Curiously, each time, the rebound is gradual and incomplete, making the head fakes at least somewhat effective."

Meanwhile, the U.S. Commodity Futures Trading Commission is investigating oil price trades totalling $7 billion placed shortly ahead of key Iran war-related announcements by Trump, Reuters reported on Thursday.

Most involved short positions, or bets on prices falling, placed on the Intercontinental Exchange (ICE) and Chicago Mercantile Exchange (CME) and were placed shortly before Trump statements announcing attack delays, the ceasefire or other changes to Iran policy that led to a decline in oil markets.