Oil prices rise more than 4% as Iran-Israel conflict escalates

By Erwin Seba

HOUSTON (Reuters) -Oil prices climbed over 4% on Tuesday as the Iran-Israel conflict raged with no end in sight, though major oil and gas infrastructure and flows have so far been spared from substantial impact.

Brent crude futures settled at $76.45 a barrel, $3.22, or 4.4%. U.S. West Texas Intermediate crude finished at $74.84 a barrel, up $3.07 or 4.28%.

While there was no noticeable interruption to oil flows, Iran partially suspended gas production at the South Pars field it shares with Qatar after an Israeli strike started a fire there on Saturday. Israel also hit the Shahran oil depot in Iran.

The continuing exchange of airstrikes between Israel and Iran returned geopolitical risk to oil markets already aware of a tight supply and demand balance, said Phil Flynn, senior analyst with the Price Futures Group.

"This is not a one-and-done; it's probably much more similar to Russia and Ukraine," Flynn said.

A collision of two oil tankers near the Strait of Hormuz, where electronic interference has increased during the conflict, highlighted the possibility that the vital waterway for oil shipments could be cut off.

"The market is largely worried about disruption through (the Strait of) Hormuz, but the risk of that is very low," said Saxo Bank analyst Ole Hansen.

There is no appetite for closing the waterway, given that Iran would lose revenue and the U.S. wants lower oil prices and lower inflation, Hansen added.

Uncertainty led market participants on Tuesday to wonder how Iran's leadership would react if they thought they were losing their grip on power, said John Kilduff, partner at Again Capital.

"We're talking a security premium upwards of $10 a barrel that's now built into the price," Kilduff said.

Despite the potential for disruption, there were signs oil supplies remain ample amid expectations of lower demand.

In its monthly oil report on Tuesday, the International Energy Agency revised its world oil demand estimate downwards by 20,000 barrels per day from last month's forecast and increased the supply estimate by 200,000 bpd to 1.8 million bpd.

Investors were also focused on central bank interest rate decisions, PVM Associates analyst Tamas Varga said in a note, with the U.S. Federal Open Market Committee set to discuss rates later on Tuesday.

(Reporting by Erwin Seba in Houston, Seher Dareen in London, Anjana Anil in Bengaluru and Jeslyn Lerh in SingaporeEditing by David Evans, Rod Nickel and Nia Williams)

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