Oil prices fell on Friday after a sharp rally earlier in the week, but crude still posted its biggest weekly gain in months as escalating conflict in the Middle East and attacks on energy infrastructure stoked fears over global supply.
Brent crude, the international benchmark, closed down 2.8% at $104.61 a barrel, while the US benchmark West Texas Intermediate (WTI) fell 2.4% to $100.05 a barrel.
Friday's drop came after a strong rally in the previous sessions, with Brent touching around $108 a barrel on Thursday and WTI topping $104.
For the week, Brent gained 8.7%, finishing above the closely watched $100 threshold, while WTI rose 9.4%. Friday's fall ended a run of five straight gaining sessions for Brent and eight days of gains for WTI.
Middle East tensions on two fronts
Markets remain on alert over the possibility of a prolonged conflict between Iran and the United States, with the escalation raising the risk of disruption to global energy flows.
Friday's pullback in prices was partly linked to reports that Iran would hold talks with Gulf states in Oman over the Strait of Hormuz, a sign that diplomatic channels remain open despite the recent tension.
The Strait of Hormuz sits at the center of the energy crisis because it is a key route for shipping oil and liquefied natural gas. Before the war began, about a fifth of the world's oil and LNG supply passed through the strait.
Investors are also watching the Red Sea closely after a build-up of Houthi forces in Yemen raised concerns over possible effects on Saudi Arabian exports.
Saudi Arabia's East-West pipeline
Fresh concern came from reports of damage to Saudi Arabia's East-West pipeline, a critical link that lets the kingdom move oil to the Red Sea and reduce its reliance on the Strait of Hormuz.
Saudi Arabia's Energy Ministry announced on Friday that it had temporarily halted the pipeline as a precautionary safety measure following multiple attacks on the infrastructure.
According to the ministry, the pipeline was targeted in attacks in the Riyadh and Medina regions on Thursday morning, and several people were injured in the incidents.
Satellite images showed smoke near the infrastructure, and reports pointed to damage at a pumping station following an attack attributed to fighters with links to Iran.
The disruption came as the International Energy Agency reported that Saudi crude production fell by 2.3 million barrels a day in August, to 6 million barrels a day, its lowest level in more than three decades.
Jim Reid of Deutsche Bank said geopolitical fears were once again driving everything in the market, pointing to concerns over shipping safety in the Red Sea and the potential hit to Saudi exports as key drivers of the pressure on prices.
US diesel prices hit a record
Supply disruptions from the war in the Middle East, combined with Ukrainian strikes on Russian refineries, pushed the average US diesel price above $6 a gallon for the first time.
Tim Waterer, chief analyst at KCM Trade, said refined products, particularly diesel, were taking a double hit at the moment, pointing to shipping restrictions in the Gulf and outages at Russian refineries as forces pushing fuel prices higher.
How long the rally could last
Analysts are divided on whether the current tightness in the oil market reflects a structural problem or a temporary shock.
Tamas Varga of PVM Oil Associates said a further rise in prices could not be ruled out, with a possible retest of the $126-a-barrel high reached in April as global inventories decline.
He added, however, that the higher prices climb, the more demand tends to be curbed.
Varga said today's crisis differs from the 1990 Gulf War because the oil market is now more flexible, and renewable energy sources can replace part of oil consumption, particularly in power generation.
The expectation is that the balance between global supply and demand will be restored either through higher production if a ceasefire is reached, or through lower demand as the use of alternative energy sources grows.
Until then, analysts warned that volatility in the oil market is set to remain especially high.
