LONDON (Reuters) - Oil prices declined on Monday and were on track to fall for the third month in a row as a strong supply outlook and questions around demand outweighed fears that Israeli strikes in Lebanon and Yemen could escalate conflict in the Middle East.

Both benchmarks had earlier gained more than $1.

Brent was on track to lose more than 9% month-on-month, which would be its biggest decline since November 2022. WTI was set to decline more than 7% since the end of August.

On Monday prices had been supported by the possibility that Iran, a key producer and member of the Organization of the Petroleum Exporting Countries, may be directly drawn into a widening Middle East conflict.

Since last week Israel has escalated attacks, conducting strikes which have killed Hezbollah and Hamas leaders in Lebanon and hit Houthi targets in Yemen. The three groups are backed by Iran.

"We suspect that some oil market participants will look past this escalation given that there still has not been a major physical supply disruption and Iran has not demonstrated any appetite to enter this nearly year-long conflict," said Helima Croft of RBC Capital Markets.

Spain's energy crisis has seen both gas and electricity prices soar,

Oil prices also had a muted response to Beijing's announcement last week of fiscal stimulus measures in the world's second-biggest economy and top oil importer.

Traders question whether the measures would be enough to boost China's weaker-than-expected demand so far this year.

Data on Monday was not encouraging for demand, showing China's manufacturing activity shrank for a fifth straight month and the services sector slowed sharply in September.