Oil slides but heads for weekly gain as market weighs geopolitical risks and global demand

Crude oil prices fell in the final trading session of the week but still posted their first weekly gain in several weeks, as the market grappled with two opposing forces: the supply shock from US-Iran tensions in the Strait of Hormuz and fears of a global economic slowdown tightening fuel demand. At Friday's close, Brent crude futures fell 1.2% to $89.4 per barrel, while US WTI retreated to $85.3 per barrel. However, on a weekly basis, both benchmarks gained approximately 3.5% - the strongest weekly gain since early in the month, driven by a wave of buying following the exchange of airstrikes between the US and Iran. The story began Wednesday, when the Pentagon confirmed that two US destroyers intercepted a series of cruise missiles targeting commercial vessels in the Strait of Hormuz - the artery carrying approximately 20% of global crude oil. Iran denied responsibility, but Western intelligence analysts believe this was retaliation for Israeli airstrikes on Iranian nuclear facilities earlier in the month. "The market is entering uncharted waters," said Daniel Yergin, vice chairman of IHS Markit, in a Bloomberg interview. "We have a real geopolitical crisis in the Strait of Hormuz, but at the same time a rapidly deteriorating demand picture in Asia." Data from the US Energy Information Administration (EIA) released mid-week showed US crude inventories fell 2.1 million barrels last week, below the 3.2 million barrel drawdown analysts had forecast. More importantly, gasoline inventories unexpectedly rose 1.8 million barrels, a sign that domestic US consumption is weakening amid persistent inflation. Meanwhile, European diesel prices hit a record high of $1,120 per ton at the Amsterdam-Rotterdam-Antwerp hub, up 28% in just two weeks. The main reason: European refineries are paying war-risk insurance premiums of up to 35% for each shipment transiting the Strait of Hormuz, and this cost is passed directly into retail prices. "This is a 2026-style supply shock but at a faster pace," Helima Croft, commodity strategist at RBC Capital Markets, wrote in a client note. "In 2026, the world had 90 days of strategic reserves. In 2026, that number is only 60 days, and China is actively buying to replenish its reserves." The demand picture tells a different story. Chinese manufacturing PMI data released Thursday showed factory activity contracted for a fourth consecutive month, falling to 49.1 - below the 50 threshold separating growth from contraction. Japan and South Korea, Asia's two largest oil-importing economies, also reported declining industrial output. "There's a paradox unfolding," said Michael Tran, director of energy strategy at RBC. "Oil prices are rising because of supply risk, but the very act of prices rising is accelerating demand destruction. Every additional dollar in oil prices is a tax on global consumers." Central banks are watching this development closely. Minutes from the Federal Reserve's June meeting released Wednesday showed officials concerned that rising energy prices would slow progress toward bringing inflation back to the 2% target. "A prolonged oil price shock would force us to keep rates higher for longer," one FOMC member was quoted in the minutes. The options market clearly reflects this uncertainty. Brent call options at $100 per barrel for December delivery are trading at their highest volume in three years, indicating that a segment of investors is hedging against the scenario of oil prices exceeding $100 before year-end. OPEC+ maintained its current production cuts of 2.2 million barrels per day at its online meeting Thursday, but internal sources say Saudi Arabia is considering opening the taps in Q4 if prices remain above $90. "The Saudis don't want prices too high because that would accelerate the energy transition," a senior energy advisor to the Saudi government told Reuters on condition of anonymity. A less-noticed factor that could change the picture: Russia's oil tanker fleet. New EU sanctions effective July 1 have left approximately 40 Russian oil tankers stranded offshore, unable to dock due to lack of insurance. If Russia cannot reroute this oil, global supply would lose another approximately 1.5 million barrels per day. On the technical side, Brent is testing the resistance zone around $90 - a level that has repeatedly capped rallies since April. The RSI (Relative Strength Index) at 68 is approaching the overbought territory of 70, suggesting the rally may be losing steam in the near term. However, if the conflict escalates into direct attacks on oil infrastructure, this resistance could be broken quickly. Hedge funds have increased net long positions in crude oil to the highest level since March, according to CFTC data released Friday. Total net long positions now stand at 412,000 contracts, up 23% from the previous week. This suggests speculators are betting on continued price increases, but it also implies a risk of sharp correction if unexpected de-escalation news emerges. "The oil market is squeezed between two extreme narratives," said Amrita Sen, founder of Energy Aspects. "One is the Hormuz closure scenario, the other is the global recession scenario. Current prices - around $85-90 - actually reflect a 50-50 probability for both scenarios." In the coming week, markets will focus on the G20 energy ministers' meeting in Rio de Janeiro, where energy security and price stability will be key topics. Additionally, the US CPI inflation data for June, expected Thursday, will be a crucial signal for the Fed's direction in the second half of the year. With all these factors, oil prices appear set to continue their high volatility in the coming weeks. The question is no longer whether prices will exceed $90, but rather which path they will take to get there - through geopolitical escalation or through expectations of demand recovery. And the answer will shape not just the energy market, but the entire global macroeconomic picture.