Oil rises as Middle East tensions return, but Fed still sees prices cooling

Oil prices edged higher in Asian trading on Friday as renewed fighting in the Middle East kept geopolitical risks firmly in focus, even as a senior US Federal Reserve official said he expects energy prices to ease over the coming year despite the latest escalation.

As of 1:27 pm Tokyo time, Brent crude rose 52 cents, or 0.68%, to $76.82 per barrel, while West Texas Intermediate (WTI) gained 46 cents, or 0.64%, to $72.54, as per OilPrice.com.

Abu Dhabi's Murban crude fell 2.99% to $71.37, while natural gas slipped 0.13% to $3.008.

Natural gas fell 0.59% to $2.99, while European natural gas declined 1.16% to 49.68, indicating that traders remain confident inventories are sufficient despite heightened geopolitical uncertainty.

Refined fuel markets also softened.

Gasoline futures fell 1.43%, while heating oil slipped 0.95%, suggesting concerns over near-term fuel demand offset some of the upward pressure from higher crude prices.

Commodity markets have spent much of the past week oscillating between fears of supply disruptions and confidence that global production remains resilient.

Renewed military activity in the Middle East has injected a geopolitical risk premium into oil prices, but traders have so far resisted pushing crude sharply higher because exports from major Gulf producers continue largely uninterrupted.

For investors, Friday's trading underscored the delicate balance shaping global commodity markets: geopolitical tensions continue to support energy prices, while expectations of ample supply, moderating inflation and resilient global growth are preventing a broader commodity rally.

Despite the renewed hostilities, New York Federal Reserve President John Williams said Thursday the central bank still expects energy prices to decline over the next six to 12 months, arguing that underlying market fundamentals remain intact.

"I still feel ... the fundamentals are that energy prices are likely to be around their peak and then to come down over time," Williams said during a conference, even as the US-Iran ceasefire effectively unraveled and military exchanges resumed across the region.

His comments reflect the Fed's baseline assumption that global oil supply will eventually outweigh geopolitical disruptions, easing one of the biggest risks to inflation.

That view is increasingly being tested.

Over the past week, crude markets have swung sharply between optimism over diplomatic efforts and fears that the conflict could intensify.

Traders have been forced to reassess supply risks after Iranian attacks on commercial shipping, US strikes inside Iran and growing concerns that any prolonged conflict could threaten traffic through Hormuz, which carries roughly one-fifth of global oil consumption and about a third of the world's seaborne crude trade.

So far, however, no sustained disruption to the waterway has materialised, helping limit gains in crude prices.

Precious and industrial metals diverged during the session.

Gold, often viewed as a safe-haven asset during geopolitical crises, edged down 0.13% to $4,118.24, indicating investors were not rushing into defensive assets despite the renewed military exchanges.

By contrast, silver climbed 0.80%, while copper advanced 0.82%, reflecting optimism about industrial demand and expectations that infrastructure spending and artificial intelligence-related investment will continue supporting consumption of industrial metals.

Energy prices remain a key variable for policymakers because higher crude costs eventually filter through to gasoline, diesel, aviation fuel, freight rates and consumer prices.

A prolonged surge in oil could complicate the Fed's battle against inflation by delaying interest-rate cuts or even forcing policymakers to consider tighter monetary policy.

Williams declined to signal how the Federal Open Market Committee might vote at its next meeting, emphasizing that decisions remain dependent on incoming economic data.

He also noted that robust investment linked to artificial intelligence infrastructure is supporting economic demand and could keep inflation elevated in the short term, even if productivity gains eventually offset some of those pressures.

Analysts say oil traders remain caught between two competing narratives.

On one hand, expectations of increased production from major exporters and recovering Gulf supplies point toward a better-balanced market later this year.

On the other, renewed military exchanges between Washington and Tehran have restored a sizeable geopolitical risk premium that many investors had begun to price out following earlier ceasefire efforts.

For now, crude prices remain well below the triple-digit levels briefly seen during the height of the conflict earlier this year, suggesting markets still expect any supply disruptions to be temporary.

The coming days are likely to hinge less on economic forecasts than on developments in the Middle East, where diplomatic efforts continue even as missiles and drones threaten to upend assumptions that oil prices have already peaked.