Oil prices fell about 1% on Tuesday, surrendering some recent gains as investors reconsidered the likelihood of immediate supply disruptions in the Middle East after the United States killed a top Iranian military commander last week.
Brent crude fell 70 cents, or 1%, to trade at $68.21 per barrel. U.S. West Texas Intermediate crude shed 57 cents, or 0.9%, to settle at $62.70 per barrel.
Prices surged during the previous two sessions on fears of escalating conflict and potential Middle East supply disruptions after a Jan. 3 Baghdad drone strike killed Qassem Soleimani, head of Iran's elite Quds Force, and Iran vowed revenge. Brent reached its highest since September while WTI rose to its strongest since April.
"The expansion in geo-risk premium related to Iran appears to be running out of steam as the complex seems to be taking a 'wait and see' attitude ahead of possible Iranian retaliation to last week's events," Jim Ritterbusch, president of trading advisory firm Ritterbusch and Associates, said in a note.
Consultancy Eurasia Group said Iran probably would focus on U.S. military targets rather than energy targets.
"That's not to say it won't continue low-level harassment of commercial shipping or regional energy infrastructure, but these activities will not be severe," it added.
Julius Baer analyst Carsten Menke said the Iranian regime was "quite rational and strategic."
"The costs of direct military confrontation are prohibitive, and disrupting oil flows would alienate loose allies such as China and India," he said.
"The closure of the Strait of Hormuz, a key choke point of global oil flows, remains a very unlikely event."
However, the United States Maritime Administration website renewed its warning about threats to U.S. commercial vessels from Iran and its proxies in the Gulf and surrounding area.
Prices also fell despite higher compliance among the Organization of the Petroleum Exporting Countries (OPEC) on meeting production quota curbs aimed at reducing supply.
OPEC members pumped 29.5 million barrels per day (bpd) last month, down 50,000 bpd from November's revised figure, according to a Reuters survey published on Monday.
U.S. crude oil stockpiles likely fell for the fourth straight week last week, though refined products stocks were expected to have risen, a Reuters poll showed on Monday ahead of weekly data.
The average estimate by six analysts was for crude stocks to have fallen by 3.6 million barrels in the week to Jan 3.