Updates with US afternoon prices

By Siddharth Cavale

NEW YORK, May 21 (Reuters) - Oil prices whipsawed in a volatile trading session on Thursday, trading lower on uncertain prospects for a resolution in the U.S.-Israeli war with Iran.

Brent crude futures LCOc1 lost $2.80, or 2.7%, to $102.22 a barrel at 1:57 p.m. ET (1757 GMT). U.S. West Texas Intermediate futures CLc1 shed $2.45, or 2.5%, to $95.81 a barrel.

Earlier in the day, oil prices swelled by 3% after Reuters reported that Iran's supreme leader issued a directive that dented hopes for a swift resolution to the war.

The Reuters report about that directive, which cited two senior Iranian sources, signaled that Tehran is hardening its stance on a key U.S. demand. The directive from Ayatollah Mojtaba Khamenei could further complicate negotiations and frustrate U.S. President Donald Trump’s efforts to broker an end to the war.

The development came a day after Iran announced a new “Persian Gulf Strait Authority,” which would oversee a "controlled maritime zone" in the Strait of Hormuz.

Prices were volatile. Gains accelerated after U.S. Secretary of State Marco Rubio said a proposed tolling system in the strait would make a diplomatic deal unfeasible. Prices pared gains later after he added that officials from Pakistan, which is acting as a mediator, will travel to Iran for talks.

"We’ve been in this situation multiple times before, which ultimately led to disappointment," ING analysts said in a note on Thursday, forecasting an average Brent price of $104 a barrel in the current quarter. Separately, UBS raised its oil price forecasts by $10 a barrel on Thursday, projecting Brent crude at $105 a barrel and WTI crude at $97 in September.

Iran warned against further attacks and unveiled steps entrenching its control of the strait, which remains mostly closed. Before the war, the strait carried oil and liquefied natural gas shipments equal to about 20% of global consumption.

Economic activity in the euro zone shrank at its sharpest rate in more than 2-1/2 years in May as a war-driven surge in living costs hammered demand for services across Europe and firms accelerated layoffs, surveys showed on Thursday.

Seven leading OPEC+ oil-producing countries will likely agree to a modest hike in July output when they meet on June 7, Reuters reported on Thursday, citing four sources. Typically, output decisions from the group would move markets, but that was not the case during Thursday's session, as supply disruptions linked to the Iran war continue to affect deliveries from several producers.