Oil prices traded lower on Wednesday after an initial spike as news broke overnight of retaliatory strikes by Iran on US military bases in Iraq.
More than a dozen missiles were fired at several locations as Iran responded to the targeted killing of its military commander Qassem Suleimani.
Brent crude, the benchmark for more than half of the world's oil, was up 1.3 per cent at $69.19 (Dh254) per barrel in early trading, but later reversed course and was trading 0.5 per cent lower than Tuesday's close at 5.14pm UAE time on Wednesday. West Texas Intermediate had also initially climbed 1.2 per cent, but was later trading 1 per cent lower.
Gold also reversed its earlier gains. Investors had initially pushed prices up by 1 per cent as investors flocked to safe haven assets, but the precious metal later fell back and traded 0.2 per cent below Tuesday's close at $1,571.38 per oz.
Oil prices have whipsawed in recent days as markets have struggled to assess the risk of heightened geopolitical tension in the region, but this "may not be enough to keep oil prices elevated in the medium-to-longer term", according to Lukman Otunuga, a senior research analyst at foreign exchange brokerage FXTM.
“Continued oil upside faces multiple obstacles in the form of rising US shale production and weak oil demand growth,” he said on Tuesday.
“Although geopolitical shocks could offer a short-term boost, developments revolving around US-China trade talks and global growth remain the primary drivers influencing oil’s outlook.”
He added that intensifying tension "is likely to stimulate risk aversion, consequently boosting investor's appetite for gold".
"Although prices have strong bullish momentum, further upside will depend on how prices react around $1,555. The precious metal should trend higher towards $1,600 as long as $1,555 proves to be reliable support," he said.
However, the ongoing belligerence between the US and Iran, and the potential for wider conflict is weighing down investor sentiment with regards to local markets, according to Capital Economics in London.
Despite higher oil prices, the Dubai Financial Market general index has fallen 2 per cent so far this week, and Saudi Arabia's Tadawul All-Share index is trading 3.2 per cent lower.
"There is no one-to-one correlation between oil prices and regional markets. If you look at last year, for instance, oil price was the best-performing asset class and MENA equity markets were probably the worst-performing region, being up only 8 per cent on a price return basis," said Charles-Henry Monchau, chief investment officer at Dubai-based brokerage Al Mal Capital.
"For Brent oil to stay around $70, demand needs to be there or something needs to happen on the supply side, whereas on the regional markets the immediate reaction by investors means if there is escalation... it means more stress in the region, an impact on tourism, an impact on businesses and no immediate impact on oil revenues, because you don't know how long oil will stay at this level."
Vijay Valecha, chief investment officer at Century Financial, said that regional economies had suffered in recent years from volatile crude prices and surplus housing inventory - both of which have affected investments.
"Should the Iranian response be more sustained, earnings for major Middle Eastern stocks, especially ones in real estate, banking & financial services are likely to take a major hit," he said.
He added that an inflow of tourists and investment in housing and infrastructure was key to the health of many regional economies.