Oil prices post weekly gains on US-Iran clashes; diesel at record high

Oil prices closed higher on Friday, capping a week of sharp gains as the United States and Iran resumed military exchanges, intensifying supply concerns in the Middle East. Brent crude settled at $96.28 a barrel, up 0.8%, while West Texas Intermediate (WTI) finished at $91.48, up 0.2%. For the week, Brent gained 7.6% and WTI rose nearly 10%.

The rally in crude has been mirrored by an even steeper climb in fuel prices, pushing inflation and government borrowing costs higher globally. Diesel, a key fuel for agriculture and transport, has been particularly affected. Average US diesel prices hit a record $5.85 per gallon, according to AAA data, as renewed US-Iran hostilities and Ukrainian attacks on Russian refineries disrupted supply. With inventories drawing down and harvesting seasons approaching, diesel prices could climb further.

The conflict has also kept shipping lanes under pressure. Only four commodity vessels transited the Strait of Hormuz on Thursday, well below the 10-day average of about 15, according to preliminary data. While the US government has said Middle Eastern oil flows have returned to near-normal levels, analysts and tanker trackers suggest otherwise.

"Oil seems to be in a phase where the conflict's gridlock and recurring hostilities are regularly awakening a risk premium embedded in prices," said Norbert Rucker of Julius Baer. However, he noted that there is no indication this week's escalation materially impacted exports, calling the rally "mostly mood and fear driven."

In response to the supply risks, Citi raised its third-quarter Brent forecast to $86 a barrel from $80, while ANZ lifted its short-term forecast to $95, with upside risk if the conflict worsens.

On the economic front, US employment rose by 162,000 jobs in August, easing fears of labor market weakness but strengthening the case for a Federal Reserve rate hike in September. "The strong employment figures point to an interest rate hike by the Federal Reserve, and that was weighing on WTI," said John Kilduff of Again Capital.

Meanwhile, Iraq increased its August oil exports to about 2.34 million barrels per day from roughly 1.35 million in July, according to Iraqi energy officials.