Oil price gains were pared back after Israel struck Hamas targets in Qatar, bringing fears of a wider conflict in the Middle East and adding to the risk premium for crude.
Brent, the benchmark for two thirds of the world's oil, was up 0.62 per cent at 12.19am UAE time on Wednesday to $66.43 a barrel. West Texas Intermediate, which tracks US crude, was trading 0.67 per cent higher at $62.68 a barrel.
Crude prices have been rallying this week as global equities gained on the growing expectation that the Federal Reserve will lower borrowing costs. A modest increase by the Opec group of oil producers for October and prospects of more sanctions on Russia also supported prices.
Crude added to its gains after Qatar blamed Israel for an attack on Tuesday afternoon and Israel announced it had struck Hamas's leadership in the Gulf country.
Hamas negotiators have been studying ceasefire proposals in Doha. Qatar and Egypt have been acting as go-betweens in efforts to end the war in Gaza.
Colby Connelly, a senior fellow at the Middle East Institute in Washington, said the muted market reaction showed there is plenty of spare capacity available in the event of a supply shock and that there could potentially be an oversupply.
"If anything, it shows the risk of potential supply threat in the Gulf region, so long as these conflicts simmer, is there but it's not a big one," Mr Connelly said.
Majed Al Ansari, a spokesman for the Qatari Ministry of Foreign Affairs, said the “cowardly Israeli attack” was aimed at residential buildings “housing several members of the political bureau of Hamas” in Doha.
“This criminal assault constitutes a blatant violation of all international laws and norms, and poses a serious threat to the security and safety of Qataris and residents in Qatar,” he added.
The Israeli army said it conducted a “precise strike” against the senior leadership of Hamas. Israeli Prime Minister Benjamin Netanyahu's office said in a statement that the attack was a “wholly independent Israeli operation”.
The attack was swiftly condemned by the UAE and other Arab countries.
US President Donald Trump's administration also expressed concern over the Israeli strike. White House press secretary Karoline Leavitt said Mr Trump had spoken with Mr Netanyahu and Sheikh Tamim, Emir of Qatar, after the strike.
“The President views Qatar as a strong ally and friend of the United States, and feels very badly about the location of this attack,” she told reporters.
Smoke was seen rising over the Katara district of Doha, and several explosions were heard in the Qatari capital.
Qatar said authorities were taking measures to contain the aftermath of the attack and to ensure the safety of nearby residents.
The district does not house significant energy infrastructure.
"It's not an event that points to direct risk to supply in the region," Mr Connelly said.
