© Reuters. FILE PHOTO: An aerial view shows an oil factory of Idemitsu Kosan Co. in Ichihara, east of Tokyo, Japan November 12, 2021, in this photo taken by Kyodo. Mandatory credit Kyodo/via REUTERS/File Photo

By Paul Carsten

LONDON (Reuters) – Oil prices eased on Tuesday after rallying more than 4% in the previous session, with traders cautious as they watched for potential supply disruptions amid military clashes between Israel and the Palestinian Islamist group Hamas.

was down 37 cents to $87.78 a barrel as of 1240 GMT, while U.S. West Texas Intermediate (WTI) crude had eased 40 cents to $85.98 a barrel. Both benchmarks had fallen by more than $1 in earlier trade.

Brent and WTI had surged more than $3.50 on Monday as the clashes raised fears that the conflict could spread beyond Gaza. Hamas launched the largest military assault on Israel in decades on Saturday, while Israel pounded the Gaza Strip on Tuesday with the fiercest air strikes in the 75-year history of its conflict with the Palestinians.

“There is still plenty of uncertainty across markets following the attacks in Israel over the weekend,” said ING analysts on Tuesday, adding that oil markets are now pricing in a risk premium.

While Israel produces very little , 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.

Iran is complicit even though the United States has no intelligence or evidence that points to Iran’s direct participation in the attacks, a White House spokesperson said on Monday.

“If the U.S. finds evidence directly implicating Iran, then the immediate reduction in Iran’s oil exports becomes a reality,” said Vivek Dhar, an energy analyst at CBA.

“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.