Oil ends week higher on renewed US-Iran strikes, diesel hits record

Oil prices climbed on Friday (Sep 4), concluding the week with significant gains following the re-establishment of military exchanges between the United States and Iran, now entering the seventh month of their conflict. Retail US diesel prices reached a record high. Brent crude futures closed at US$92.68 a barrel, up 76 cents or 0.8 percent.

West Texas Intermediate crude futures ended at US$91.48 a barrel, up 18 cents or 0.2 percent. Over the week, Brent crude saw a 7.6 percent increase, while US crude rose nearly 10 percent, as Middle East supply routes remain hampered by the war. This surge in oil prices, coupled with a sharp rise in fuel costs, has spurred inflation and government borrowing costs globally, heightening concerns about potential global economic growth deceleration without relief.

Claudio Galimberti, chief economist at Rystad Energy, noted that various sectors of the economy are impacted by diesel, contributing to the elevated US government bond yields, reflecting expectations of ongoing inflation. Average US diesel prices reached record highs, averaging US$5.85 per gallon, due to renewed US-Iran hostilities and attacks on Russian refineries in Ukraine.

The diesel price could further increase due to the sharp reduction in inventories and preparations for agriculture's harvesting and planting seasons. Diesel, a key fuel for agricultural machinery, has seen its futures contract, heating oil, surge as winter approaches. Citi raised its average Brent crude price forecast for the third quarter to US$86 a barrel from US$80, citing slower-than-anticipated reopening of the Strait of Hormuz.

ANZ analysts increased their short-term Brent crude forecast to US$95 a barrel, with potential upside if the Middle East conflict escalates. Despite the US economy adding 162,000 jobs in August, signaling a robust labor market, the prospect of Federal Reserve rate hikes in September is intensifying pressure on WTI prices. US government assertions that Middle Eastern oil flows have returned to near-normal levels are met with skepticism from analysts and shipping data, which show significantly disrupted flows.

Four cargo vessels passed through the Strait of Hormuz on Thursday, below the 10-day average of about 15, according to preliminary shipping data. Norbert Rucker, head of economics at Julius Baer, observed that the ongoing conflict and recurring hostilities instill a risk premium in oil prices, but no evidence yet indicates that this week's escalation materially affected Middle East exports or tightened the oil market.

The present rally in oil seems primarily driven by sentiment and fear. Recent US strikes that resulted in casualties, including Iranian civilians, were among the most severe clashes between the two nations since July. The US effort to curb Iran's economy by halting its oil exports and circumventing sanctions is proving increasingly challenging to manage, according to three senior Iranian sources.

Iraq increased its August oil exports to around 2.34 million barrels per day, up from 1.35 million bpd in July, according to Iraqi energy officials.