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By Anna Hirtenstein

LONDON (Reuters) -Oil prices declined on Friday, after settling around 1.6% lower in the previous session, as the market’s risk premium faded after Israel and Hamas agreed to the first phase of a plan to end the war in Gaza.

Brent crude futures were down 16 cents, or 0.25%, at $65.06 a barrel at 0819 GMT. U.S. West Texas Intermediate crude was down 7 cents, or 0.11%, to $61.44.

“Finally having some kind of peace process in the Middle East is lowering the shoulders a little bit,” said Bjarne Schieldrop, chief commodities analyst at SEB. This could ease fears about crude carriers passing through the Suez Canal and the Red Sea, he said.

BOTH BENCHMARKS ON TRACK FOR WEEKLY GAINS

Israel and the Palestinian militant group Hamas signed a ceasefire agreement on Thursday in the first phase of U.S. President Donald Trump’s initiative to end the war in Gaza.

Under the deal, which Israel’s government ratified on Friday, fighting will cease, Israel will partially withdraw from Gaza, and Hamas will free all remaining hostages it captured in the attack that precipitated the war, in exchange for hundreds of prisoners held by Israel.

Numerous vessels have been attacked by the Iran-aligned Houthis in Yemen since 2023, targeting ships they deem linked to Israel in what they described as solidarity with Palestinians over the war in Gaza.

On a weekly basis, both crude benchmarks were on track to close in positive territory. Brent is up around 1% and WTI about 0.6% so far, after falling steeply last week.

Prices climbed about 1% on Wednesday to a one-week high because of stalled progress on a Ukraine peace deal, a sign that sanctions against Russia, the world’s second-largest oil exporter, could continue.

The Gaza ceasefire deal means the focus can move back to the impending oil surplus, as OPEC proceeds with the unwinding of production cuts, said Daniel Hynes, an analyst at ANZ.

A smaller-than-expected November hike in output agreed by the Organization of the Petroleum Exporting Countries and allies (OPEC+) on Sunday eased some of those oversupply concerns.

“Markets’ expectations for a sharp ramp up in crude supply have not manifested themselves in substantially lower prices,” BMI analysts said in a note on Friday.

“The most recent rise in production is lower than previously feared, contributing to a slight rise in prices for the week,” they said.

Investors are also worried that a prolonged U.S. government shutdown could dampen the American economy and hurt oil demand in the world’s largest crude consumer.

(Reporting by Anna Hirtenstein. Additional reporting by Sudarshan Varadhan. Editing by Christian Schmollinger and Mark Potter)