Oil prices retreat after a sharp weekly rally

Brent crude settled at $104.61 a barrel on September 11, while U.S. West Texas Intermediate (WTI) settled at $100.05 a barrel. Both benchmarks fell by roughly 3% during the session after climbing sharply earlier in the week.

Despite Friday's decline, Brent and WTI remained on track for weekly gains of more than 8%, reflecting concerns that the conflict in the Middle East could continue to disrupt oil supplies and shipping routes.

The decline was partly driven by reports of potential diplomatic efforts to secure shipping through the Strait of Hormuz. Such developments can reduce the geopolitical risk premium embedded in crude prices.

However, the underlying supply situation remains fragile.

Saudi Arabia shuts key oil pipeline

One of the most significant developments is Saudi Arabia's temporary shutdown of its East-West oil pipeline following a drone attack believed to have originated from Iraq.

According to Reuters, the 1,200-kilometer pipeline has the capacity to transport around 4 million to 5 million barrels of oil per day, equivalent to roughly 4% to 5% of global oil supply.

The pipeline is strategically important because it allows Saudi Arabia to move crude from its eastern oil-producing region to Red Sea ports, reducing its reliance on the Strait of Hormuz.

Its disruption adds another layer of risk to an already tight global oil market.

Strait of Hormuz remains a major risk

Shipping through the Strait of Hormuz remains one of the most closely watched factors in the oil market.

Preliminary vessel-tracking data cited by Reuters showed that only seven vessels passed through the strait on September 10, down from 11 vessels a day earlier.

The Strait of Hormuz is one of the world's most important energy corridors. Prolonged disruption could therefore have a direct impact on global oil and gas supplies.

Meanwhile, tensions around the Red Sea and the Bab el-Mandeb Strait have also increased, raising concerns over alternative shipping routes.

U.S. diesel prices top $6 per gallon

The supply shock is not limited to crude oil. Refined products are also coming under significant pressure.

According to GasBuddy, the U.S. national average diesel price surpassed $6 per gallon for the first time on September 10. Reuters attributed the increase to supply disruptions linked to the Middle East conflict, attacks on Russian refineries and fuel export restrictions.

U.S. diesel inventories are also around 13% below the five-year average, adding to concerns about tight refined-product supplies.

Diesel is particularly important for freight transportation, agriculture and industrial activity. A prolonged increase in diesel prices could therefore raise logistics costs and add to inflationary pressures.

IEA warns of a major supply decline

The International Energy Agency warned on September 11 that global oil supply could decline by approximately 5.7 million barrels per day in 2026, or around 6%, because of ongoing conflicts and disruptions in the Middle East and Gulf region.

The IEA also said Saudi Arabia's oil production had fallen to around 6 million barrels per day, its lowest level in more than three decades.

At the same time, high fuel prices are weakening global oil demand. This creates a highly volatile market in which falling supply and weakening demand are pulling prices in opposite directions.

Commerzbank raises year-end oil forecast

Commerzbank has raised its year-end Brent crude forecast to $85 per barrel, from $75 previously.

The bank also raised its forecasts for diesel to $1,200 per tonne, from $950, and jet fuel to $1,230 per tonne, from $980.

The revisions highlight concerns that refined fuel markets could remain under pressure for longer than the crude oil market itself.

What will determine the next move in oil prices?

Three factors will be particularly important in the near term.

First, shipping through the Strait of Hormuz. A meaningful recovery in vessel traffic could remove part of the geopolitical risk premium from crude prices. Continued restrictions, however, could push prices higher.

Second, energy infrastructure in Saudi Arabia and the wider Middle East. Further attacks on pipelines, pumping stations or refineries could tighten physical supplies.

Third, refined-product prices. If diesel and other refined fuels continue to rise faster than crude oil, pressure on transportation costs and global inflation could intensify.

Conclusion

The nearly 3% decline in oil prices on Friday does not necessarily signal an end to supply concerns.

Saudi Arabia's temporary shutdown of the East-West pipeline, restricted shipping through the Strait of Hormuz and record U.S. diesel prices all point to continued stress across global energy markets.

Oil prices are therefore likely to remain highly volatile. Developments surrounding the Strait of Hormuz, Middle Eastern energy infrastructure and the restoration of oil flows will be critical for determining the market's next direction.

Sources: Reuters, IEA, Commerzbank and GasBuddy.