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By Erwin Seba
HOUSTON (Reuters) - Oil prices fell on Tuesday on easing concerns about potential supply disruptions from the battle between Israel and the Palestinian Islamist group Hamas though traders remained watchful.
Brent crude was down 47 cents at $87.68 a barrel as of 11:35 CDT (1635 GMT), while U.S. West Texas Intermediate (WTI) crude fell 42 cents to $85.92 a barrel. Both benchmarks had fallen by more than $1 in earlier trade.
"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. Hamas launched the largest military assault on Israel in decades on Saturday, prompting the fiercest Israeli air strikes on the Gaza Strip in the 75-year history of its conflict with the Palestinians.
"After solid gains in the previous session of over 4% the oil markets have turned cautious with prices edging lower," said Fiona Cincotta, senior financial markets analyst with City Index.
"For now, the market seems to accept that oil flows will not be directly affected, with no proof that there will be a meaningful reduction in oil exports," Cincotta said.
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.
Israel's port of Ashkelon and its oil terminal have been shut in the wake of the conflict, sources said on Monday.
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.
(Reporting by Paul Carsten in London and Jeslyn Lerh in Singapore; Additional reporting by Arathy Somasekhar in Houston; editing by Susan Fenton, Jason Neely, Paul Simao and Emelia Sithole-Matarise)
