Crude futures retreated from multi-month highs in midday trading on Friday, reversing gains from the previous session, as markets weighed reports of potential Gulf-Iran talks for a temporary arrangement to manage shipping through the Strait of Hormuz.
Front-month West Texas Intermediate futures slipped 2.9% to $99.50 per barrel, while Brent futures fell 3.1% to $104.31/bbl.
Gelber & Associates strategists said that the pullback reflects a partial reduction in the immediate Hormuz risk premium rather than a meaningful improvement in physical supply, with vessel traffic still severely restricted.
US commercial crude oil inventories decreased by 400,000 barrels to 424.1 million barrels in the week ended Sep. 4, the Energy Information Administration said in its weekly report released Thursday.
Crude inventories matched the five-year average for this time of year, the EIA said. The draw is significantly below Investing.com's estimate of 1.4 million barrels for the week ended Sep. 4.
Gelber & Associates analysts said WTI is still on track for a weekly gain of over 8%, making Friday's decline a volatile reversal in a market dominated by Middle East shipping disruptions.
Diplomats from the six-member bloc of Gulf countries are set to meet Iranian officials on Monday in a push by Oman and Iran to secure buy-in for a deal to temporarily manage shipping via the Hormuz.
Iranian Foreign Ministry Spokesman Esmaeil Baghaei said that the meeting would bring together Iran, Iraq and other countries bordering the Persian Gulf and Gulf of Oman, describing the initiative as an important step toward strengthening regional understanding and cooperation.
Saxo Bank strategists said that the meeting would be the first at this level since the war began, underscoring the growing urgency to restore more reliable maritime flows through the Gulf.
Fueling bearish sentiment, the International Energy Agency said on Friday that disruptions to global oil supplies are forcing lower consumption. The IEA slashed its forecast for this year's decline in global oil demand by 940,000 barrels per day, projecting a drop of 2.5 million b/d.
The agency projected that 2026 will see the biggest contraction in global oil demand since the Covid-19 pandemic as a result of higher fuel costs and lower supply.
Crude demand is projected to recover by 2.6 million b/d in 2027, narrowly offsetting this year's losses, the EIA said.
The Middle East conflict has widened over the past two weeks, with Houthi assaults on Saudi energy facilities and US strikes targeting Iranian oil tankers.
Yemen's Houthis seized control of the port city of Mocha on Thursday and advanced down the Red Sea coast to strategic islands, posing further threat to Red Sea traffic, as traffic via the Hormuz remains restricted as tanker attacks in the region have intensified.
The militant group advanced to Perim Island in the Bab el-Mandeb, potentially strengthening its ability to threaten another key chokepoint for oil and refined-product shipments between the Middle East and Europe.
RBC Capital Markets strategists said a resumption of a full-blown Saudi-Houthi war could be a catalyst for "our high oil price scenario coming to fruition," as the Middle East conflict is a core assumption of that price call.