Oil prices settle lower
HOUSTON: Oil prices settled down on Friday as the US imposed new Iran-related sanctions, marking a diplomatic approach that fed hopes of a negotiated agreement, a day after President Donald Trump said he might take two weeks to decide US involvement in the Israel-Iran conflict.
Brent crude futures settled down $1.84, or 2.33%, to $77.01 a barrel. US West Texas Intermediate crude for July - which did not settle on Thursday as it was a US holiday and expires on Friday - was down 21 cents, or 0.28%, at $74.93. The more liquid August contract settled at $73.84.
Brent rose 3.6% on the week, while front-month US crude futures increased 2.7%. The Trump administration issued fresh Iran-related sanctions, including on two entities based in Hong Kong, and counter-terrorism-related sanctions, according to a notice posted to the US Treasury Department website. The sanctions target at least 20 entities, five individuals and three vessels, according to Treasury's Office of Foreign Asset Control. 'Those sanctions are cutting both ways. They may be part of a broader negotiation approach towards Iran. The fact they are undertaking this is a signal they are trying to resolve this outside of conflict,' said John Kilduff, partner at Again Capital in New York. Oil prices jumped almost 3% on Thursday after Israel bombed nuclear targets in Iran, while Iran - OPEC's third-largest producer - fired missiles and drones at Israel.
Neither side showed any sign of backing down in the week-old war. Brent prices retreated after the White House said Trump would decide whether the United States would get involved in the Israel-Iran conflict in the next two weeks.
'Although a major escalation is yet to occur, risks to supply from the region remain high, still hinging upon the potential for US involvement,' said Russell Shor, senior market analyst at Tradu.com. Israel's UN ambassador said Israel seeks genuine efforts on Iran's nuclear capabilities from Friday's meeting between European and Iranian ministers, not just another round of talks.
'However, while Israel and Iran carry on pounding away at each other, there can always be an unintended action that escalates the conflict and touches upon oil infrastructure,' PVM analyst John Evans said. Iran in the past has threatened to close the Strait of Hormuz, a vital route for Middle East oil exports.
Oil exports so far have not been disrupted and there is no shortage of supply, said Giovanni Staunovo, an analyst at UBS. 'The direction of oil prices from here will depend on whether there are supply disruptions,' he said.
An escalation of the conflict in such a way that Israel attacks export infrastructure or Iran disrupts shipping through the strait could lead to oil at $100 a barrel being a reality, said Panmure Liberum analyst Ashley Kelty. Elsewhere, the EU has abandoned its proposal to lower the price cap on Russian oil to $45, Bloomberg reported. US energy firms this week cut the number of oil and natural gas rigs operating for an eighth week in a row for the first time since September 2023, energy services firm Baker Hughes said in its closely followed report.
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US B-2 bombers involved in Iran strikes, U.S. official says Trump called the attack 'a spectacular military success' in a televised address to the nation and said Iran's 'key nuclear enrichment facilities have been completely and totally obliterated'. He said the U.S. military could go after other targets in Iran if the country did not agree to peace. 'I think the markets are going to be initially alarmed, and I think oil will open higher,' said Mark Spindel, chief investment officer at Potomac River Capital. 'We don't have any damage assessment and that will take some time. Even though he has described this as 'done', we're engaged. What comes next?' Spindel said. 'I think the uncertainty is going to blanket the markets, as now Americans everywhere are going to be exposed. It's going to raise uncertainty and volatility, particularly in oil,' he added. Spindel, however, said there was time to digest the news before markets open and said he was making arrangements to talk to other market participants. Oil prices, inflation A key concern for markets would center around the potential impact of the developments in the Middle East on oil prices and thus on inflation. A rise in inflation could dampen consumer confidence and lessen the chance of near-term interest rate cuts. 'This adds a complicated new layer of risk that we'll have to consider and pay attention to,' said Jack Ablin, chief investment officer of Cresset Capital. 'This is definitely going to have an impact on energy prices and potentially on inflation as well.' While global benchmark Brent crude futures have risen as much as 18% since June 10, hitting a near five-month high of $79.04 on Thursday, the S&P 500 has been little changed, following an initial drop when Israel launched its attacks on Iran on June 13. Trump says US forces bombed Iran nuclear sites; says 'Fordow is gone' Before the U.S. attack on Saturday, analysts at Oxford Economics modeled three scenarios, including a de-escalation of the conflict, a complete shutdown in Iranian oil production and a closure of the Strait of Hormuz, 'each with increasingly large impacts on global oil prices.' In the most severe case, global oil prices jump to around $130 per barrel, driving U.S. inflation near 6% by the end of this year, Oxford said in the note. 'Although the price shock inevitably dampens consumer spending because of the hit to real incomes, the scale of the rise in inflation and concerns about the potential for second-round inflation effects likely ruin any chance of rate cuts in the U.S. this year,' Oxford said in the note, which was published before the U.S. strikes. In comments after the announcement on Saturday, Jamie Cox, managing partner at Harris Financial Group, agreed oil prices would likely spike on the initial news. But Cox said he expected prices to likely level in a few days as the attacks could lead Iran to seek a peace deal with Israel and the United States. 'With this demonstration of force and total annihilation of its nuclear capabilities, they've lost all of their leverage and will likely hit the escape button to a peace deal,' Cox said. Economists warn that a dramatic rise in oil prices could damage a global economy already strained by Trump's tariffs. Still, any pullback in equities might be fleeting, history suggests. During past prominent instances of Middle East tensions coming to a boil, including the 2003 Iraq invasion and the 2019 attacks on Saudi oil facilities, stocks initially languished but soon recovered to trade higher in the months ahead. World leaders react to US attack on Iran On average, the S&P 500 slipped 0.3% in the three weeks following the start of conflict, but was 2.3% higher on average two months following the conflict, according to data from Wedbush Securities and CapIQ Pro. Dollar woes An escalation in the conflict could have mixed implications for the U.S. dollar, which has tumbled this year amid worries over diminished U.S. exceptionalism. In the event of U.S. direct engagement in the Iran-Israel war, the dollar could initially benefit from a safety bid, analysts said. 'Do we see a flight to safety? That would signal yields going lower and the dollar getting stronger,' said Steve Sosnick, chief market strategist at IBKR in Greenwich, Connecticut. 'It's hard to imagine stocks not reacting negatively and the question is how much. It will depend on Iranian reaction and whether oil prices spike.'
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