U.S. crude oil falls nearly 2% as traders unfazed by Israel-Hezbollah escalation

U.S crude oil futures fell nearly 2% on Monday as traders appeared unfazed by the risk of a widening war between Israel and the Iran-backed militia Hezbollah.

A rocket fired from Lebanon killed 12 children in the Israel-occupied Golan Heights on Saturday. Israel has blamed Hezbollah for the attack. The militia has denied responsibility.

Israel's security Cabinet has authorized Prime Minister Benjamin Netanyahu's government to decide on how and when to respond to the rocket attack.

Here are Monday's closing energy prices:

Middle East tensions pushed oil prices higher in the spring when Israel and Iran nearly went to war, but the market's reaction to events in the region have been muted since then in the absence of an actual disruption of oil supplies.

"The oil market has largely faded the Middle East war story after the exchange of fire between Iran and Israel in April failed to trigger a wider conflict or put energy supplies materially at risk," Helima Croft, head of global commodity strategy at RBC Capital Markets, told clients in a Sunday note.

Croft, however, warned that a direct confrontation between Israel and Hezbollah could be the catalyst that brings OPEC member Iran into the war due to the militia's importance for Tehran's regional interests.

"Israel may indeed exercise restraint, as it did in April, and opt for a more measured retaliation that seems serious but does not open another war front," Croft wrote.

But near daily cross-border attacks and the amount of internally displaced people inside Israel "seem to point more clearly in the direction of a more severe conflict or, at a minimum, an elevated risk of escalation through miscalculation," the analyst warned.