Crude oil futures prices plunged 2.8% after reports Israel and Palestinians were near a truce eased worries the conflict would block supplies from the region.
Hamas, the Gaza Strip's ruling party, is close to a deal to halt hostilities along the Gaza Strip, but hasn't yet reached one, the Associated Press cited a senior Hamas official as saying. Meanwhile, Israeli government spokesman Mark Regev told CNN that a cease-fire deal with Gaza militants hasn't been finalized and the "ball is still in play."
U.S. oil futures had climbed 4.5% over the previous two sessions on fears that the conflict could spread throughout the Middle East and disrupt oil production and transportation.
"We've a had a 5% gain...since the shooting started. If it's going to stop, then the [oil] bulls have run out of steam," said Addison Armstrong, senior director of market research at Tradition Energy in Stamford, Conn. "That's the main cause of the selloff today."
Front-month January crude oil futures prices on the New York Mercantile Exchange settled down $2.53 a barrel, at $86.75 a barrel. The decline was the biggest in a single day since Nov. 7 when data showed a sharp drop in U.S. oil demand in the wake of Hurricane Sandy.
North Sea Brent crude oil on the InterContinental Exchange settled 1.7%, or $1.87, lower to $109.83 a barrel.
Crude-oil prices began to fall even before the truce report, with traders and analysts citing increased diplomatic efforts to quell the Gaza turmoil by the U.S. and the United Nations, along with Egypt, Qatar and Turkey.
"The market has built about a $3 to $5 a barrel risk premium into the price of oil since the fighting began last week," said Dominick Chirichella, analyst at the Energy Management Institute. "The price of oil will likely fall quickly and pretty strongly" if a diplomatic solution can be reached, he said.
As fears of an expanding Mideast conflict ease, market participants said traders will be faced with the abundant oil production and weak demand that has plagued the market since mid-September, the last time U.S. futures moved over $100 a barrel in intraday trading.
Mr. Armstrong said a Gaza cease-fire would send oil traders back to focusing on the supply and demand fundamentals and could set the stage for oil prices to fall below $80 a barrel for the first time since late June.
The global crude-oil market is well supplied, while signs of a sagging global economy prompts fears that the world's appetite for crude is eroding, traders and analysts said.
"While the global economy is continuing to falter, with no signs that a reversal is imminent" for oil prices, Mr. Chirichella said.
U.S. oil inventories stand at a four-month high, and the surplus from 2011 levels has widened out to a three-year high of near 39 million barrels, or 11.5%. Analysts expected data set for release Thursday by the federal Energy Information Administration to show stocks rose again last week, by 800,000 barrels. Analysts also expected the data to show a 1-million-barrel gain in gasolnie stocks and a 800,000-barrel fall in distillates (diesel and heating oil).
The American Petroleum Instiute, a trade group, said in its survey late Tuesday that crude oil stocks fell by 1.924 million barrels, while gasoline stocks fell 4.809 million barrels and distillates dropped 4.397 million barrels. API said refiners boosted operations to 86.1% of capacity from 83.9% a week earlier.
Tim Evans, energy futures specialist at Citi Futures, said he sees fair value for U.S. crude at around $82 a barrel now and $95 a barrel for Brent, given the supply/demand picture.
December reformulated gasoline blendstock futures settled 4.2 cents, or 1.5% lower, at $2.7125 a gallon. December heating oil lost 1.2%, or 3.59 cents, to settle at $3.0392 a gallon.
Copyright (c) 2012 Dow Jones & Company, Inc.
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