U.S. crude futures fell more than 4% on Tuesday, after Israel reportedly told the U.S. that it is not planning to strike Iran's oil facilities, relieving fears that a major supply disruption in the Middle East is on the horizon.

Israel plans to limit its retaliatory strikes in Iran to military targets and does not plan to hit the Islamic Republic's oil industry or its nuclear facilities, three senior Biden administration officials told NBC News.

Oil prices spiked earlier this month after Iran launched a ballistic missile attack against Israel, raising fears that Israel's response could lead to a cycle of further escalation that disrupts crude supplies in the region.

Geopolitical risk has completely evaporated from the market, Helima Croft, head of global commodity strategy at RBC Capital Markets told CNBC's "The Exchange."

Here are Tuesday's closing energy prices:

• West Texas Intermediate November contract: $70.58 per barrel, down $3.25, or 4.4%. Year to date, U.S. crude oil has fallen more than 1%.
• Brent December contract: $74.25 per barrel, down $3.21, or 4.14%. Year to date, the global benchmark has declined more than 3%.
• RBOB Gasoline November contract:  $2.0377 per gallon, down 3.36%. Year to date, gasoline has pulled back about 3%.
• Natural Gas November contract: $2.498 per thousand cubic feet, up 0.16%. Year to date, gas has is marginally lower.

Oil prices have pulled back significantly from the highs reached on Iran's Oct. 1 attack. Israel has refrained from hitting back so far, and traders have shifted focus to market fundamentals as a looming oil surplus is expected next year.

But Croft warned of a spiral of escalation that could ultimately lead to an oil disruption. If Israel launches a major strike on military targets in Iran that causes casualties, the Islamic Republic's response could lead Israel to escalate further.

"The White House was sufficiently concerned about Iranian retaliation [...] that they really worked very hard to get Israel to walk back its potential target list," Croft said. Israel could be holding the oil card in reserve until they see how Iran responds to their strike, she said.

OPEC cut its 2024 oil forecast for the third consecutive month in a row this week. And the International Energy Agency expects demand to grow by just under 900,000 barrels per day in 2024 and 1 million bpd in 2025, a significant slowdown compared with growth of 2 million bpd in the post-pandemic period.

Chinese oil demand is particularly weak, with consumption dropping by 500,000 bpd in August, the fourth monthly decline in a row, according to an IEA report published Tuesday. Meanwhile, crude production in the Americas, led by the U.S., is poised to grow by 1.5 million bpd this year and next, the IEA said.

The IEA said its members are prepared to take action if there is a supply disruption in the Middle East.

"For now, supply keeps flowing, and in the absence of a major disruption, the market is faced with a sizeable surplus in the new year," the IEA said in its monthly report.

OPEC also has millions of barrels per day in spare capacity that could jump into the breach if there is a supply disruption. But Saudi Arabia may not act immediately, Croft said.

"The Saudis will be in a very cautious mode about bringing barrels back If there is some type of escalation," she said. "They will want to see that there is a physical supply disruption before they really jump in front of this."