NEW YORK (Reuters) -Oil prices settled higher on Wednesday in a volatile session as investors weighed the chance of supply disruptions from the Iran-Israel conflict and potential direct U.S. involvement.

Brent crude futures settled 25 cents higher at $76.70 a barrel. U.S. West Texas Intermediate crude rose 30 cents at $75.14. Earlier in the session, prices were down around 2%. On Tuesday, prices jumped over 4%.

Iranian Supreme Leader Ayatollah Ali Khamenei rejected U.S. President Donald Trump's demand for unconditional surrender, and Trump said his patience had run out but did not indicate what his next step would be.

Speaking to reporters outside the White House, Trump declined to say whether he had made any decision on joining Israel's bombing campaign against arch-enemy Iran.

"I may do it. I may not do it. I mean, nobody knows what I'm going to do," he said.

Trump said Iranian officials had reached out about negotiations including a possible meeting at the White House but "it's very late to be talking," he said.

A source familiar with internal discussions said one option Trump and his team were considering included joining Israel in strikes against Iranian nuclear sites.

"The crude markets remain in a wait-and-see mode with the Israeli/Iran conflict still offering an array of question marks that could either spike Brent to as high as $83/bbl or prompt a plunge back to about the $68 area," analysts at energy advisory firm Ritterbusch and Associates said in a note. 

HIGHER RISK

Direct U.S. involvement would widen the conflict, putting energy infrastructure in the region at higher risk of attack, analysts say. 

"The biggest fear for the oil market is the shutdown of the Strait of Hormuz," ING analysts said in a note. 

"Almost a third of global seaborne oil trade moves through this chokepoint. A significant disruption to these flows would be enough to push prices to $120 (a barrel)."

Iran is OPEC's third-largest producer, extracting about 3.3 million barrels per day (bpd) of crude oil.

Iran's ambassador to the United Nations in Geneva said Tehran has conveyed to Washington that it will respond firmly to the U.S. if it becomes directly involved in Israel's military campaign.

The U.S. Federal Reserve held interest rates steady on Wednesday and policymakers signaled borrowing costs are still likely to fall this year, but slowed the overall pace of expected future rate cuts in the face of estimated higher inflation flowing from the Trump administration's tariff plans.

While policymakers still anticipate cutting rates by half a percentage point this year, as they projected in March and December, they slightly slowed the pace from there to a single quarter-percentage-point cut in each of 2026 and 2027 in a protracted fight to return inflation to the central bank's 2% target.

Lower interest rates generally boost economic growth and demand for oil.

In U.S. supply, crude stocks fell by 11.5 million barrels to 420.9 million barrels last week, the Energy Information Administration said on Wednesday. Analysts had expected a 1.8 million-barrel draw.

(Reporting by Stephanie Kelly and Ahmad GhaddarAdditional reporting by Colleen Howe,Editing by David Goodman, Ed Osmond and David Gregorio)

By Stephanie Kelly