By Erwin Seba
HOUSTON (Reuters) -Oil prices settled lower on Tuesday, but bounced off session lows as concerns eased about potential supply disruptions from the battle between Israel and the Palestinian Islamist group Hamas, though traders remained watchful.
Brent crude settled down 50 cents, or 0.57%, at $87.65 a barrel. U.S. West Texas Intermediate (WTI) crude slid 41 cents to finish at $85.97 a barrel. At the session low, both benchmarks were down by more than $1.
"Today it's more like a ping pong game of fear-on, fear-off rather than trading on fundamentals," said Phil Flynn, an analyst at Price Futures Group.
Brent and WTI had surged more than $3.50 on Monday as the military clashes raised fears that the conflict could spread beyond Gaza.
"There was a little bit of profit-taking from the stark advance yesterday," said John Kilduff, partner in Again Capital LLC.
While Israel produces very little crude oil, markets worried that if the conflict escalates it could hurt Middle East supply and worsen an expected deficit for the rest of the year.
"No direct oil supplies are impacted by the conflict at the moment so it's a wait-and-see situation," Kilduff said.
U.S. officials have pointed fingers at Iran as being involved in the Hamas attack on Israel, but credible evidence of the Islamic Republic's role has yet to appear.
"Furthermore, there has been no evidence so far that Iran is complicit in the attacks, giving oil traders little reason to push prices higher for now," Cincotta said.
Vivek Dhar, an energy analyst at CBA, said revelation of evidence of the Iranian involvement would push prices higher.
"We continue to believe that Brent oil will ultimately stabilise between $90-$100/bbl in Q4 2023," said Dhar, adding that the Palestine-Israel conflict raises the risk of Brent futures tracking at $100/bbl and above.
In a more positive sign for supply, Venezuela and the U.S. have progressed in talks that could provide sanctions relief to Caracas by allowing at least one additional foreign oil firm to take Venezuelan crude oil under some conditions.