Oil fell on Thursday as traders assessed the ongoing conflict in the Middle East, and hotter-than-expected economic output in the US suggested the Federal Reserve will stay on its path of higher-for-longer interest rates.

Brent (BZ=F) and West Texas Intermediate (CL=F) both fell more than 2.5% on Thursday.

The declines come amid an acceleration of economic activity in the US, with gross domestic product (GDP) rising at an annualized rate of 4.9% last quarter. The data was released ahead of a key Federal Reserve meeting next week.

"The Fed's job isn't done," Quincy Krosby, chief global strategist for LPL Financial, said in a note to investors on Thursday morning.

"While the market does not expect a rate hike at next week's Fed meeting, there are concerns that the Fed may suggest that they may need to increase rates again before the end of the year if inflation doesn't ease at a faster pace, and if the economy continues to defy expectations of a slowdown," she added.

On Thursday the US dollar index (DX-Y) rose, also putting pressure on crude prices and the broader markets in general. Oil is denominated in dollars.

Crude traders are also selling amid speculation the Israel-Hamas war could potentially stay contained, with ongoing diplomatic efforts in the region to delay a widely anticipated ground invasion of Gaza.

Oil spiked immediately following Hamas' surprise attack on Israel earlier this month. The anticipation of a widening conflict sent Brent and WTI up more than 4% in one day.

Demand destruction concerns had started to creep into the market prior to the attacks when crude prices reached a 2023 high in late September following output cuts by OPEC+ and unilateral reductions by Saudi Arabia.

"The market has been fading the geopolitical risk and trending lower," Vectis Energy Partners principal Tamar Essner told Yahoo Finance this week.

"The reason the market has been so complacent about the recent events in Israel with the war with Hamas is because there is so much spare capacity. Remember that Saudi has a million barrels a day just in unilateral cuts, in addition to all their OPEC production cuts."

Essner says the most near-term risk from a supply perspective would be if the Biden administration were to sanction Iranian barrels.

"But I think that will be more bark than bite, it will actually be very difficult to implement those sanctions at this point, because most of Iran's oil is going to China in non-dollarized trade," she added.

On Wednesday, the Energy Information Administration's report showed US stockpiles rose last week by 1.372 million barrels. The rise came as a surprise to analysts who were expecting a gain of about 240,000 barrels.

Ines Ferre is a senior business reporter for Yahoo Finance. Follow her on Twitter at @ines_ferre.

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