Oil settles higher after Israeli attack on Qatar

By Shariq Khan

NEW YORK (Reuters) - Oil prices settled higher on Tuesday after the Israeli military said it carried out an attack on Hamas leadership in the Qatari capital Doha, an expansion of its military actions in the Middle East.

Brent crude futures settled 37 cents, or 0.6%, higher at $66.39 a barrel, while U.S. West Texas Intermediate crude futures also climbed 37 cents, or 0.6%, to close at $62.63 a barrel.

Both benchmarks had gained almost 2% shortly after the Israeli attack on Qatar, but gave up the majority of those gains later as the United States assured Doha that such a thing would not happen again on its soil.

"Both the U.S. and Qatar have made it clear they are not seeking further escalation, while the muted reaction from other (Gulf Cooperation Council) members reinforces the view that the risk of a wider regional flare-up remains contained," said Jorge Leon, head of geopolitical analysis at Rystad Energy.

"For now, geopolitical risk premiums are easing rather than building," Leon said.

Oil prices also pared some gains because the attack did not create any immediate supply disruption, UBS analyst Giovanni Staunovo said.

The oil benchmarks were trading higher prior to the attack on Qatar, supported by the latest oil output increase from OPEC+ being smaller than anticipated, expectations that China will continue stockpiling oil and concerns over potential new sanctions against Russia.

Capping oil's gains, the U.S. Energy Information Administration said it expects global crude prices to be under significant pressure in the months ahead due to rising inventories.

Physical oil markets also appeared to be softening, with prompt spreads weakening heavily in the Atlantic basin, StoneX analyst Alex Hodes said. Softer prompt physical markets are typically an indicator of weak demand.

"The fact that the market did not respond with such an escalation (in the Middle East) is an indication of how weak the market is in my opinion," Hodes said.

U.S. crude oil inventories rose last week, market sources said, citing a report by the American Petroleum Institute. Official EIA data on U.S. stockpiles is due on Wednesday at 10:30 am ET.

Traders are also expecting the Federal Reserve, which meets next week, to cut U.S. interest rates. Lower rates reduce consumer borrowing costs and can boost economic growth and demand for oil.

U.S. employment data for the 12 months through March was revised lower more sharply than expected on Tuesday, prompting traders to bet that the Fed will cut short-term rates next week and continue, with more in store this year to shore up the labor market.

(Reporting by Shariq Khan, Alex Lawler, Ahmad Ghaddar, Anjana Anil and Sam Li; Editing by David Gregorio, Marguerita Choy and Nia Williams)