Oil prices slipped Friday but remained on track to end the week above $100 a barrel for the first time since mid-May and U.S. diesel prices hit a record high, as attacks along key Middle East shipping routes stoked prolonged supply disruption fears.
Brent crude futures fell $1.65, or 1.53%, to $105.98 a barrel by 0758 GMT. U.S. West Texas Intermediate crude fell $1.36, or 1.33%, to $101.12 a barrel.
The benchmarks pared all early gains to trade lower after the Financial Times reported that foreign ministers in the Middle East are trying to work out a temporary deal with Iran to manage shipping through the Strait of Hormuz.
Both benchmarks rose more than 6% Thursday and were still trading more than 10% higher on a weekly basis.
"Some headlines of possible new talks in the Middle East are weighing moderately on oil prices today," said UBS energy analyst Giovanni Staunovo, adding: "I keep seeing near-term risks to the upside for oil prices, but we should expect ongoing high price volatility too."
Iran said Wednesday it had attacked 10 ships near the Strait of Hormuz, after the U.S. hit five Iranian oil tankers. Iran's Islamic Revolutionary Guard Corps said it would escalate its response to any further attacks.
Vessel transits at the Strait of Hormuz fell to seven Thursday from 11 the previous day, preliminary ship-tracking data showed Friday, well below the 10-day average of 15.
The Strait of Hormuz handled about one-fifth of global daily oil and liquefied natural gas supplies before the Iran war began in late February.
Iran-aligned Houthis seized control of Yemen's port of Mocha Thursday, posing a further threat to Red Sea traffic, while Gulf traffic remains restricted through the Strait of Hormuz as tanker attacks in the region have intensified in recent days.
Attacks from Yemen on Saudi energy facilities marked an escalation beyond Iran and the Strait of Hormuz and raised fears of prolonged disruptions in the broader region, analysts say.
Global oil supply and demand will fall further than previously thought this year, the International Energy Agency (IEA) said, as a lack of progress in ending the Iran war delays the return of normal Middle East flows into 2027.
Oil supply disruptions due to the Iran war, along with Ukrainian attacks on Russia's refineries, pushed the U.S. national average diesel price past $6 a gallon for the first time ever Thursday, according to price tracker GasBuddy.
The national average of $6.05 is up from $5.85 last week and $3.70 this time last year, according to motor club AAA.
Higher diesel prices mean more expensive transportation for a long list of everyday goods. That's because diesel is used for many freight and delivery networks. And some businesses have already passed along steeper costs to consumers.
"Refined products, particularly diesel, are feeling a one-two punch right now," said Tim Waterer, chief market analyst at KCM Trade.
"As long as both the Gulf shipping constraints and Russian refining outages remain in play, diesel and other refined products are likely to show a higher upside tendency than the broader crude market," he added.
Even if oil prices retreat as tensions ease, they are likely to remain at elevated levels for the rest of the year, adding to inflation uncertainties, said Yu Song, chief China economist at UBS Securities in a commentary.
U.S. President Donald Trump has not shown any signs of easing attacks on Iran. He warned the U.S. may hit Iran's Pickaxe Mountain near its heavily damaged Natanz uranium enrichment facility, but said he thought the war would end immediately after the November midterm elections.
Elsewhere, China's state planner said Friday it will raise retail price caps on petrol and diesel from September 12 by 260 yuan ($38.76) and 250 yuan per metric ton, respectively.
