Oil prices rose above $US91 a barrel on Monday as diplomatic efforts to address the crisis in the Middle East intensified, but slipped back later in the day, falling below $US90 on reports that that US was nearing a deal to ease sanctions on Venezuela.
Prices dropped on Monday afternoon (Tuesday AEDT) after the Washington Post reported that the United States and Venezuela had agreed to a deal that would ease restrictions on Venezuela's oil industry in exchange for a freer presidential election in the country next year.
The fluctuating price of crude oil around the world could have major ramifications, and even hit the price of consumer petrol in Australia.
Brent crude futures, the international oil benchmark, rose as high as $US91 a barrel in Asian hours on Monday, up slightly from Friday's settlement price of $US90.89. Prices last traded at $US89.65 a barrel.
West Texas Intermediate, the US benchmark, briefly rose to $US87.98, compared with Friday's closing price of $US87.68.
It last traded at $US86.50.
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Growing risk of escalation
Still, investors are concerned the Israel-Hamas war could spark a wider conflict in the oil-rich region and further tighten global oil supply.
Both futures had surged Friday, after Israel's military warned more than 1 million people to leave northern Gaza, triggering worries about a potential ground offensive by Israel in retaliation for terror attacks by Hamas that killed at least 1400 people.
Speaking to CBS Sunday, US National Security Adviser Jake Sullivan said even though there was no new intelligence that the threat level from Iran had changed, "there is a risk of an escalation of this conflict".
Analysts at ANZ Research expect oil prices to hit $US100 a barrel in the short term because of the growing risk of regional escalation.
Neither Israel nor Gaza is a significant oil supplier, but the risk to oil markets will rise if "the conflict broadens," they wrote in a research note on Friday.
"If [Iran] becomes involved, up to 20 million barrels per day of oil could be at risk of disruption directly and through obstructed logistics," they added.
The "Middle East risk" is dominating the landscape for global asset prices, said Stephen Innes, managing partner at SPI Asset Management.
"The ongoing conflict could weigh even further on the global oil supply over time by potentially reducing the probability of Saudi-Israeli normalisation and posing downside risks to Iranian oil production, leading to a further surge in oil prices," he said.
Global oil prices had risen since late June as production cuts by Saudi Arabia and Russia fueled worries about reduced global supply.
New US measures, unveiled last week, aimed at raising the cost of Russia's attempts to skirt a cap on the price of its oil might have also driven oil prices higher.
In currency markets, the shekel weakened Monday, hitting less than 4 per US dollar for the first time since 2015. The Israeli currency has tumbled close to 4 per cent in the past 10 days.
Israel's central bank said last week that it planned to sell up to $US30 billion ($47.25 billion) of foreign exchange to stabilise the shekel after it fell sharply following the Hamas attacks.
US stocks, meanwhile, closed higher on Monday as investors appeared to shrug off fears of growing geopolitical tension in the Middle East. The Dow closed 314 points, or 0.9 per cent, higher; the S&P 500 was up 1.1 per cent and the Nasdaq Composite gained 1.2 per cent.
