Oil flat, reversing gains after news of Gaza ceasefire

A worker holds up a fuel pump nozzle after filling up the tank of a car at a petrol station in Cairo October 3, 2012.

NEW YORK (Reuters) - Oil erased early gains on Wednesday after Egyptian officials said a truce had at last been reached in the Gaza Strip, ending eight days of fighting between Israel and Hamas.

The midday retreat extended several days of volatile oil trading, with prices whipsawed between fears of a deepening conflict that could engulf regional oil superpowers and hope for a ceasefire. Prices had earlier risen by more than $1.50 a barrel after an explosion on a Tel Aviv bus.

U.S. government data showing an unexpectedly large drop in weekly fuel stockpiles had also lent support to gasoline and heating oil prices, which outperformed crude.

Brent crude futures were up 25 cents, or 0.2 percent, at $110.08 a barrel by 12:25 p.m. EST (1725 GMT), off an earlier session-high of $111.46.

U.S. crude rose dipped 8 cents to $86.67, with trading activity winding down ahead of the U.S. Thanksgiving Day holiday on Thursday. Benchmark gasoline and heating oil futures rose more than 0.5 percent on the day.

At midday, Egypt's foreign minister announced a truce between Israeli and Palestinian forces would begin at 1900 GMT, ending a series of air strikes and rocket attacks that had unnerved the region and oil traders. That came despite an explosion on a bus in Tel Aviv earlier in the day that some feared might thwart ceasefire talks.

Although little oil is produced in Israel, concern that major hydrocarbon producing Arab nations could become involved in the conflict have aroused fears that supplies from the Gulf can be disrupted.

If the truce holds, however, focus may return to the market's moribund underlying fundamentals. Euro zone finance ministers ended a meeting in Brussels on Wednesday without agreement on the next tranche of loans to Greece.

"The Middle East tensions could continue to give prices some life in the near term but we suspect that bearish economic factors will be dominant," said Jeremy Friesen, commodity strategist at Societe Generale in Hong Kong.

And U.S. economic data offered limited cause for hope. Manufacturing grew in November at its quickest pace in five months and new jobless claims dropped, but consumer sentiment showed only a marginal improvement.

U.S. crude and refined product stocks fell last week as plants processed more crude and imports dropped, data from the U.S. Energy Information Administration showed.