Oil ticks down in Asian trade despite rising Middle East tensions

But ANZ analysts said in a note that "a strong military response from the U.S." to the drone attack "could still trigger a strong reaction from the market."

President Biden said he had decided how to respond to the attack without giving further details, but added that he wanted to avoid a wider war in the Middle East.

Iran-aligned Iraqi armed group Kataib Hezbollah - which the U.S. Pentagon had suggested could be behind the attacks, though no final assessment had been made - announced on Tuesday the suspension of all its military operations against U.S. troops in the region.

In the Israel-Palestinian conflict, Hamas said on Tuesday it had received and was studying a ceasefire proposal. It appeared to be the most serious peace initiative since the war's first and only brief ceasefire which fell apart in November.

But Sycamore said the market was concerned that a ceasefire in Gaza would not necessarily put a halt to attacks by Iran-backed Houthis on ships in the Red Sea, which have disrupted global shipping and oil trading.

Bearish factors include a deepening crisis in China's real estate sector following the liquidation of property company China Evergrande Group, which has raised concerns about demand from the world's largest crude importer. Markets are also awaiting the release of China's PMI data on Wednesday, which will likely show a contraction for a fouth straight month.