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Oil Jumps on Mideast Tension but Rally Could Fizzle

Oil prices are on the rise but should quickly reverse course if the military tensions between Israel and Hamas subside.

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"Right now, you're pricing in all kinds of what ifs and worries," said John Kilduff of Again Capital. "If history is a guide, I would look for prices to come off unless it escalates."

Brent crude, the international benchmark, soared nearly 3 percent Monday, to settle around $112 per barrel. West Texas Intermediate followed Brent higher, settling above $89 a barrel.

"It's very hard to be short when there's a shooting war in the Middle East," said Addison Armstrong of Tradition Energy.

"I think if there weren't a shooting war in the Middle East, we wouldn't be trading at $89. We'd be trading in the low 80s. This conflagration is worth about 10 percent," Armstrong said. (Read More: Why Markets Shouldn't Fear Israel's Gaza Offensive…Yet.)

Egyptian Prime Minister Hisham Kandil Monday said a cease-fire agreement could be close. Kandil said Egypt has been in contact with Israeli and Palestinian officials, and other nations in an effort to bring a cease-fire to Gaza.

Israel said Monday it preferred a diplomatic solution but was prepared to send in troops to Gaza as it bombed dozens of targets. The exiled leader of Hamas, Khaled Mashaal said a truce was possible but Hamas, the Islamist group in charge of the Gaza Strip, would not accept Israeli demands and wants Israel to stop its strikes and lift its blockade.

Armstrong said even though the military conflict in Gaza has no impact on any oil producing area, it is likely to be supportive of prices as long as it continues.

"If this causes higher Brent prices to persist, that's going to impact the oil in the Atlantic basin and oil refiners that are reliant on that," he said. That in turn would pressure gasoline prices, especially on the East Coast, where the Phillips 66 Bayway refinery in New Jersey has yet to restart after Super Storm Sandy .

Gasoline has fallen 28 cents a gallon in the past month, to a national average of $3.41, according to AAA. It is still higher priced on the East Coast.

"It's only Brent that has any kind of tightness," Armstrong said. "Brent is more tied in the physical market to grades in the Middle East. Certainly we've got plenty of oil over here, and we'll be producing more of it over time."

But a jump in Brent could still pinch East Coast refineries because they are supplied with Brent.

Oil supplies are plentiful, and prices had been in decline. OPEC last week pared back its forecast for global oil demand for the next three years because of economic weakness and because of increased supplies from non-OPEC countries.

The organization also acknowledged for the first time that technology for oil and gas shale production has changed the supply picture. The International Energy Agency last week cut its forecast for oil demand and said for 2012, it now sees demand at 89.6 million barrels, slightly higher than 2011's 88.9 million barrels a day.

Follow Patti Domm on Twitter: @pattidomm

Questions? Comments? Email us at marketinsider@cnbc.com

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  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

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