Oil prices fall as market bets U.S.-Iran fighting won't escalate into wider war

Oil prices fell Thursday, as the market bet the latest round of U.S. strikes on Iran would not lead to a return to full-scale war between the two countries.

Brent crude futures, the international benchmark, were down 1.3% to $76.98 per barrel. West Texas Intermediate futures fell 1.6% to $72.38.

Prices rose earlier in the session after the U.S. bombed around 90 targets in Iran overnight. It was the second consecutive day of U.S. strikes in retaliation for Iranian attacks this week on tankers transiting the Strait of Hormuz.

WTI advanced 4.4% on Wednesday, registering its biggest daily gain since June 1, after President Donald Trump said the ceasefire with Iran was over and threatened to reimpose the U.S. naval blockade. Brent settled up 5.4% in the prior session, notching its biggest daily gain since May 4.

Tanker traffic through Hormuz has slowed this week as the security situation in the strait has deteriorated. But the oil market is not pricing in a full closure of Hormuz, said Andy Lipow, president of Lipow Oil Associates.

"It appears to be pricing in a new normal where periods of conflict (perhaps we might call them missile skirmishes) occur between periods of relative calm (or unease) that permit the transit of tankers," Lipow wrote in a Thursday note.

The U.S. and Iran are likely to return to negotiations in the next couple weeks, Citibank analysts told clients in a Thursday note. Washington and Tehran have too much to lose from a spiral of escalation that leads to the destruction of energy infrastucture in the region, they said.

"On the US side, President Trump has shown an affinity to strong equity prices, and stable bond markets, so this is the basis for our view he will return to negotiating in relatively short order," the Citi analysts said.