Oil prices fell in early trading on Friday but remained on track for significant weekly gains as the United States and Iran continued trading strikes. Brent futures fell 6 cents, or 0.08%, to $76.24 a barrel by 0125 GMT, while U.S. West Texas Intermediate (WTI) crude lost 4 cents, or 0.06%, to $72.04. Despite the slight decline, Brent was set for a 6% gain and WTI was headed for a 5% increase for the week. The modest Friday decline came as concerns that accelerating inflation could dampen fuel demand weighed on the market and pressured prices, according to Reuters.
The memorandum of understanding that took effect June 18 was supposed to end all hostilities, provide sanctions relief for Iran and reopen the Strait of Hormuz but has failed to deliver any of these objectives in full. The US Treasury on Tuesday revoked the waiver on sanctioned Iranian oil that it had granted last month, in response to attacks on ships in Hormuz, undercutting some of the leverage that the US had in negotiations. A US official said Thursday that technical talks between the two sides were continuing and that the US was committed to finding a resolution with Iran, but the latest clashes and renewal of Trump's economic pressure campaign have raised the stakes significantly. "The MOU is unraveling," said Mona Yacoubian, director of the Middle East Program at the Center for Strategic and International Studies, "But I don't think it will completely collapse, because I don't think either side has an interest in returning to full conflict."
The conflict has escalated with Iranian armed forces launching attacks on U.S. military infrastructure in Gulf states on Thursday following U.S. strikes on Iran's southern coastal and eastern provinces, further straining a three-week-old ceasefire. Iranian media reported multiple explosions across southern Iran, including Bushehr, where one of the country's nuclear plants is located. The renewed fighting came the day that Iran buried its slain Supreme Leader Ayatollah Ali Khamenei, the culmination of a week of mass funeral processions and rallies. Khamenei was killed on the first day of the war on February 28. Traffic through the Strait of Hormuz came to a near standstill on Thursday as Iran's insistence that it retains control of the passage remains a major point of contention. US Central Command said Thursday that "Iran does not control the Strait of Hormuz," highlighting the fundamental disagreement between the two sides. The conflict has delayed the full reopening of the Strait of Hormuz, a key waterway that about 20% of daily global oil and gas supplies passed through before the war.
Despite the U.S. ramping up attacks on military sites in Iran, the market drew some reassurance from the Trump administration's decision to avoid targeting Iranian energy infrastructure. "Despite the US ramping up attacks on military sites in Iran, the market drew some reassurance from the Trump administration's decision to avoid targeting Iranian energy infrastructure," said Daniel Hynes, the senior commodity strategist for ANZ bank, as reported by Reuters. "This was aided by comments from President Trump, who said he doesn't expect a return to a full-scale conflict." U.S. President Donald Trump had said on Wednesday he did not think the war would restart and that "anything that happens is going to be over very quickly." However, at this week's NATO summit in Turkey, Trump branded Iranian officials as "scum" and said further talks would be a "waste of time," while adding that his envoys could seek a deal as they see fit. Trump, under fire at home for the war's impact on gasoline prices as November's midterm elections draw nearer, has shown little appetite to keep up the military campaign much longer.
Beyond geopolitical tensions, concerns over rising inflation are also pressuring oil demand and market prices, according to Reuters. In the U.S., the number of Americans filing claims for unemployment benefits fell last week, indicating that the labor market remained in a "slow-hire, slow-fire" mode. Meanwhile, in China, the world's second-biggest economy, producer price inflation surged to a four-year high in June, piling pressure on manufacturers' profit margins as weak domestic demand limited pricing power. These economic factors continue to weigh on the broader outlook for oil demand despite ongoing supply disruption concerns, with worry over slowing global demand preventing a sharper rally in crude prices.
