Oil falls more than $2 on easing Middle East fears

HOUSTON, Oct 26 (Reuters) – Oil prices fell more $2 a barrel on Thursday as fears of a wider Middle East conflict eased at the same time that U.S. demand showed signs of weakening.

Brent crude futures were down $2.28, or 2.53%, at $87.85 a barrel by 12:40 p.m. CDT (1740 GMT), having settled nearly 2% higher on Wednesday. U.S. West Texas Intermediate crude futures slid by $2.10, or 2.41%, to $83.29 a barrel.

Fears of a spillover affecting global crude supplies from the conflict between Israel and Palestinian militant group Hamas, which could embroil Iran and its allies in the region, have supported oil prices in recent weeks.

Those worries were retreating by midday on Thursday.

“The security premium we’ve been paying since earlier in the month seems to be deflating,” said John Kilduff, partner with Again Capital LLC.

The U.S. and other countries are urging Israel to delay a full invasion of Gaza, which is reeling from almost three weeks of Israeli bombing triggered by a mass killing spree in southern Israel by Iranian-backed Hamas.

“The market is on edge,” said Price Futures analyst Phil Flynn. “It’s critical to understand that we’re one headline away from a big rally in the market.”

Worries about the broader global economy also weighed on prices. U.S. Treasury yields headed back toward 5% on Thursday, dragging shares around the world to multi-month lows.

The U.S. economy, however, grew at its fastest pace in nearly two years in the third quarter, data showed on Thursday, raising expectations that the Federal Reserve will keep interest rates high for longer.

A rise in U.S. crude inventories in the latest week indicated weaker demand.

Inventories (USOILC=ECI) climbed by 1.4 million barrels to 421.1 million barrels, according to the Energy Information Administration (EIA), exceeding a 240,000-barrel gain expected by analysts from a Reuters poll.

The data follows a surprise downturn this month in euro zone business activity data.

“Though with no clear signs the war will spiral, attention is returning to volatile swings in the U.S. bond market and the broader fragile state of the world economy. That is unsettling investors,” MUFG analyst Ehsan Khoman said.

The European Central Bank left interest rates unchanged as expected on Thursday, snapping an unprecedented streak of 10 consecutive rate hikes, and maintained its guidance which implies steady policy ahead.

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