Oil retreated as traders assessed the extent of supply damages in the Middle East and whether a recent rally may have been overdone. Brent slipped under $108 a barrel, after rising 4% over the previous two sessions. The recent gains, following a shutdown of Saudi Arabia’s East-West pipeline due to Houthi strikes and a supply halt in Libya, lifted Brent’s 14-day relative strength index above 70, a level that can suggest futures were overbought. Oil has surged almost 80% this year as the war between the US and Iran has spread across the Middle East, while the conflict between Russia and Ukraine drags on. The jump, along with even steeper rises in fuel costs, have contributed to concerns over global inflation, with the Federal Reserve expected to raise interest rates later Wednesday to cool price increases. There are already signs that Saudi Arabia is working to keep its exports going, even with its vital East-West pipeline shut down. Riyadh is ramping up sales of crude from outside the Strait of Hormuz following the disruption, which suggests it’s boosting exports of oil loaded inside the Persian Gulf. Signs of tentative steps toward deescalation have also emerged, with Secretary of State Marco Rubio discussing Oman’s role in potential talks on a call with the country’s foreign minister. US officials met with representatives of the Iran-backed Houthis over the weekend in Oman, Reuters reported, citing people familiar with the matter.

"I would see this as a breather rather than a clear reversal for now," said Charu Chanana, chief investment strategist at Saxo Markets in Singapore, cautioning that risks remained severe. Any further escalation or prolonged outages could quickly put upward pressure back on prices, she added. There’s no clarity on when the Saudi pipeline will restart. While US Energy Secretary Chris Wright told CNBC the outage would “be measured in days,” UK authorities fear it may be mostly shut for six weeks, Bloomberg reported on Monday. As a result of the interruption, Saudi Aramco has been delaying oil deliveries to some European customers, sparking a scramble for alternative barrels. Traders are also tracking turmoil in Yemen, where Houthi militants have been advancing against local rivals, while escalating attacks on targets in Saudi Arabia and its shipping routes. The group has pushed toward the Bab el-Mandeb Strait, the chokepoint at the southern end of the Red Sea. The price of Middle Eastern crude loading outside the Persian Gulf rose to the highest since March on growing concerns that supply shortages may be returning to the critical levels seen in the early days of the conflict. Oman crude futures advanced to $132.09 a barrel.

"The situation in the Middle East remains on an escalatory path, with the market struggling to keep abreast of the threats to passage through the Red Sea and Hormuz, alongside pipeline and shipping damage," said Saul Kavonic, senior energy analyst at MST Marquee. "This will keep oil prices elevated."US supplies may continue to provide a buffer against disruptions, with an industry report pointing to a rise in stockpiles. The industry-funded American Petroleum Institute said US crude inventories rose by 7.1 million barrels last week, while holdings of gasoline and distillates also expanded, according to a document seen by Bloomberg. Official US government figures are due later Wednesday. The diesel market has been particularly tight, with supplies hit both by the conflict in the Middle East and Ukrainian attacks on Russian refineries. US diesel futures settled at a record on Tuesday, and average retail pump prices are also at an all-time high. Senate Majority Leader John Thune said that he was “open to exploring” an export ban. Freight has also soared given the dislocations in global shipping, with flows through the Strait of Hormuz still below pre-war levels and refiners seeking cargoes from more-distant suppliers. The cost of shipping US crude to Asia hit a record, with a very large...