Investing.com– Oil prices fell Tuesday, as easing tensions over an Iran-Israel war saw traders price out a risk premium in crude. 

At 08:45 ET (12:45 GMT), fell 0.9% to $86.21 a barrel, while  fell 1.1% to $81.04 a barrel .

Traders seen pricing out risk premium from oil prices

Crude prices slid to over three-week lows on Monday, and have continued to head lower, after a short-lived surge higher Tuesday, amid growing conviction that Iran and Israel will not enter an all-out war.

Iran gave little indication that it planned to immediately retaliate against Israel over a recent strike, while also downplaying the full impact of the attack.

This fed into hopes that the two countries will wind down hostilities, presenting a more stable outlook for geopolitical conditions in the Middle East. Such a scenario saw traders begin steadily pricing out a risk premium from oil prices. 

Fears of an Iran-Israel war had driven oil prices to near six-month highs earlier in April, as markets bet on supply disruptions stemming from a broader war in the Middle East. 

But while chances of such an event now appeared less, there still remained a possibility of more aggression, especially as Israel kept up its strikes against Gaza. 

Iraqi-based groups also claimed they will ramp up missile strikes against the U.S. and its allies in the region. 

Solid European data offered demand upside hope

Crude prices had risen briefly during the European session after activity data had painted a brighter picture of the economic outlook for the region, a major source of demand for crude.

Data released earlier Tuesday showed that overall business activity in the eurozone expanded at its fastest pace in nearly a year this month, led by a buoyant recovery in the bloc’s dominant service industry.

This plays into the idea that oil markets will grow tighter in the coming months, especially following recent production curbs from Russia, and as U.S. fuel demand picks up ahead of the summer driving season. 

Russia had last month cut down fuel exports amid Ukrainian strikes on its major fuel refineries, while the Organization of Petroleum Exporting Countries and allies was also seen maintaining its pace of production cuts until at least end-June. 

Tighter sanctions on Iran?

Bets on tighter supplies were furthered by the U.S. preparing tighter oil export restrictions on Iran, even if it remained unclear just how strict the U.S. would be, given that high gasoline prices in the U.S. have become a contentious topic for the Biden administration.

The U.S. Senate will shortly begin considering a foreign aid package that includes sanctions on Iran’s oil exports that target ships, ports, and refineries that process Iranian oil.

Additionally, EU foreign ministers agreed in principle on Monday to expand sanctions on Iran following Tehran’s missile and drone attack on Israel this month.

(Ambar Warrick contributed to this article.)