Oil holds weekly gains amid renewed Gulf conflict

Oil prices edged lower on Friday but remained on course for strong weekly gains as renewed fighting between the United States and Iran kept the risk of Middle East supply disruption firmly embedded in the market.
Brent crude futures slipped 6 cents, or 0.08%, to $76.24 a barrel by 0125 GMT. US West Texas Intermediate crude fell 4 cents, or 0.06%, to $72.04. Brent was set to rise about 6% over the week, while WTI was heading for a gain of roughly 5%.

The modest retreat followed volatile trading driven by fresh US strikes against Iran and Iranian retaliation targeting American-linked infrastructure in the Gulf. The exchanges have strained attempts to contain the conflict and revived concern that energy production, export terminals or shipping routes could become direct targets.

Attention remains focused on the Strait of Hormuz, the narrow waterway connecting Gulf producers with international markets. Passage through the strait remains restricted, leaving traders alert to any decline in tanker movements or escalation involving commercial vessels.

A prolonged disruption could affect exports from Iran, Saudi Arabia, Iraq, Kuwait and other major producers. Alternative pipelines can carry only part of the region’s output, making uninterrupted maritime access essential to global supply.

Oil prices jumped earlier in the week after Washington resumed military operations and Tehran responded with further attacks. Brent climbed above $78 a barrel during the rally, while WTI reached its highest level in more than two weeks before both benchmarks surrendered part of their gains.

The pullback reflected expectations among some traders that neither Washington nor Tehran wants a conflict extensive enough to damage oil installations or bring shipping across the Gulf to a halt. US President Donald Trump has played down the prospect of a prolonged military campaign, offering limited reassurance to markets.

Energy infrastructure has so far avoided the scale of damage that could remove millions of barrels from daily supply. That distinction has prevented crude prices from returning to the extreme levels recorded during the sharpest phase of the conflict earlier this year.

The market nevertheless continues to price in a geopolitical premium. Low speculative positioning before the latest attacks amplified the initial advance as investors who had expected falling prices rushed to close bearish positions.

Inflation concerns are now limiting the rally. Higher fuel and transport costs could reinforce price pressures across major economies, weaken household spending and discourage industrial activity. Persistent inflation could also delay interest-rate reductions, increasing borrowing costs and reducing energy demand.

China’s producer prices have accelerated, adding to concern about rising costs for manufacturers in the world’s largest crude-importing economy. Any slowdown in factory output, construction or exports would weaken expectations for oil consumption during the second half of the year.

Economic signals from the United States have been more resilient. Applications for unemployment benefits have fallen, suggesting that the labour market remains stable despite uncertainty created by the conflict and higher energy costs. Strong employment can support fuel consumption, although it may also give the Federal Reserve less reason to lower interest rates quickly.

Supply expectations outside the immediate conflict are also restraining prices. OPEC+ has approved another increase in production quotas for August, adding 188,000 barrels per day to planned output. The group has been gradually reversing earlier cuts as it seeks to reclaim market share while avoiding a sharp decline in prices.

Actual production increases may be smaller than the announced quotas because several members have limited spare capacity or face operational disruptions. Gulf shipping restrictions have also complicated efforts to restore exports after the severe interruption earlier in the year.

Production from countries outside OPEC+, particularly the United States, Brazil, Canada and Guyana, continues to provide the market with additional supply. Growth from those producers has reduced the ability of geopolitical shocks to create an immediate physical shortage.

Demand projections remain vulnerable to inflation, trade frictions and slower manufacturing activity. Refiners are also assessing whether higher crude costs can be passed on to consumers without weakening purchases of petrol, diesel and aviation fuel.