• The recent oil rally is taking a pause as Israel has not retaliated against Iran yet.
• Oil prices have surged more than 7% through Tuesday's close since Iran fired 180 ballistic missiles at Israel last week.
• Israel is expected to focus on military and intelligence sites when it strikes back against Iran, according to media reports.

Crude oil futures fell more than 4% on Tuesday as the rally spurred by heightened geopolitical risk paused while the market waits for Israel to strike back against Iran.

"Oil can keep ascending only for so long, purely based on perceptions and not actual supply disruption," Tamas Varga, an analyst at oil broker PVM, said in a Tuesday note.

Oil prices have surged more than 7% through Tuesday's close since Iran fired roughly 180 ballistic missiles at Israel last week, raising fears that Israel might retaliate by hitting Iran's crude industry.

President Joe Biden, however, has publicly discouraged Israel from hitting Iran's oil infrastructure. Israel will likely hit military and intelligence sites in Iran first, officials told The New York Times.

The Jerusalem Post also reported that Israel is expected to focus on military and intelligence facilities.

Israel Defense Minister Yoav Gallant is scheduled to meet with U.S. Secretary of Defense Lloyd Austin at the Pentagon on Wednesday "to further discuss ongoing security developments in the Middle East," press secretary Maj. Gen. Pat Ryder told reporters in a briefing Monday.

Here are Tuesday's closing energy prices:

• West Texas Intermediate November contract: $73.57 per barrel, down $3.57, or 4.63%. Year to date, U.S. crude has gained more than 2%.
• Brent December contract: $77.18 per barrel, down $3.75, or 4.63%. Year to date, the global benchmark is little changed.
• RBOB Gasoline November contract: $2.0681 per gallon, down 3.98%. Year to date, gasoline is down more than 1%.
• Natural Gas November contract: $2.733 per thousand cubic feet, down 0.47%. Year to date, gas is ahead nearly 9%.

"War sirens in the Middle East had prompted oil tourists to flock [to] town to buy the oil rush," Manish Raj, managing director of Velandera Energy Partners, told CNBC.

"Seasoned oil investors have seen this movie before — these are the people who sell on the war hype and buy back when prices normalize," Raj said.

The market was also disappointed that Chinese officials did not announce any new stimulus plans at a press briefing Tuesday.

Prior to the recent escalation in the Middle East, the market was swept by bearish sentiment on soft demand in China, the world's largest crude importer, and worries that oil supplies will exceed demand in 2025. In early September, oil prices hit their lowest level since December 2021.

"Ongoing concerns about China's demand persist due to the lack of stimulus, while the Middle East conflict has not led to any supply disruptions," Svetlana Tretyakova, senior oil market analyst at Rystad Energy, told CNBC.

"Also the price drop may reflect profit-taking after two weeks of gains, not purely fundamentals," Tretyakova said.