REUTERS, London

Oil prices surged more than 2 percent on Monday as military clashes between Israel and the Palestinian Islamist group Hamas ignited fears of a wider conflict in the Middle East.

Brent crude was up $2.28, or 2.7 percent, to $86.86 a barrel by 0859 GMT, while US West Texas Intermediate crude was at $85.23 a barrel, up $2.44 or nearly 3 percent. Both benchmarks spiked by more than $4 a barrel earlier in the session.

The surge in oil prices reversed last week’s downtrend - the largest weekly decline since March - in which Brent fell about 11 percent and WTI retreated more than 8 percent as a darkening macroeconomic outlook intensified concerns about global demand.

While the underlying supply-demand balance is unaffected, said Tamas Varga of oil broker PVM, “any rise in tension in the Middle East usually leads to an increase in oil prices and it is no different this time around”.

Hamas on Saturday launched the largest military assault on Israel in decades, triggering a wave of retaliatory Israeli air strikes on Gaza.

The eruption of violence threatens to derail US efforts to broker a rapprochement between Saudi Arabia and Israel, in which the kingdom would normalise ties with Israel in return for a defence deal between Washington and Riyadh.

Saudi officials reportedly on Friday told the White House that they were willing to raise output next year as part of the proposed Israel deal. Riyadh and Moscow have agreed to a combined 1.3 million barrel per day (bpd) voluntary cut until the end of 2023.

The question is how long will this oil rally last, Citi analysts said.

“Timing is everything and the attacks almost certainly postpone any Saudi-Israeli rapprochement, along with any high probability expectation of Saudi Arabia reducing or eliminating its extra 1 million bpd cut if prices resume their recent fall.”