Brent crude tops $116 on Middle East conflict fears

Oil prices climbed to a six-month high on Friday as traders priced the odds of escalating fighting in the Middle East. Brent crude futures for December delivery settled at $116.72 per barrel, up $3.55 or 3.14%, marking their highest close since April 29. The Brent crude rally capped a third consecutive week of gains for the international benchmark, which rose close to 6% over the week.

US benchmark West Texas Intermediate (WTI) crude also rose sharply, settling at $103.27 a barrel, up $3.80 or 3.8%. WTI gained about 2.3% over the week. The United States Oil Fund, which tracks US crude futures, touched $167.88, its highest level since May 2015.

The Brent crude gains were driven by growing expectations of a renewed US-Iran confrontation. The New York Times reported that the US and Israel have drawn up plans for renewed attacks on Iran after the November 3 midterm elections. President Donald Trump has telegraphed an escalation after the elections, while saying he will not attack Iran before the midterms and suggesting fuel prices will fall afterward. Trump has also said no negotiations are currently underway with Iran.

Attacks in Saudi Arabia lift Brent crude

Attacks near the Red Sea have added to worries about further constraints on oil supplies from the region. Houthi militants have stepped up attacks on Saudi Arabia, including on airports and an Aramco oil field this week. Saudi Aramco on Thursday ordered the evacuation of its headquarters in Dhahran, the oil giant's first such evacuation since the Iran war began. The United States has ordered nonessential embassy personnel to depart Saudi Arabia after the attacks.

The United Arab Emirates also reported an oil spill, adding to concerns over potential disruptions to Middle East energy supplies. Iran's army chief has declared that the military is entirely ready for war after bolstering its capabilities, while the Strait of Hormuz remains at the centre of the conflict. A report said US and Israeli forces have accelerated military drills for a limited but high-intensity operation, with potential targets including Iranian energy hubs, nuclear facilities and missile and drone arsenals.

Traders are focusing on the possibility that any escalation could threaten oil production, shipping routes and supplies from the Middle East, a key region for global energy markets. The Brent crude rally lifted Wall Street's energy sector by 2.5% on Friday, taking it to a record high, even as major US stock indexes ended lower. The Dow Jones Industrial Average fell 652.82 points to 52,215.16, the S&P 500 lost 39.75 points to 7,623.68 and the Nasdaq Composite slipped 53.52 points to 25,955.34.

What higher Brent crude means for fuel prices

The jump in Brent crude is already showing up at American fuel pumps. On Friday, the national price of gasoline stood at $4.29 per gallon, roughly $1.22 higher than a year ago. Diesel hovered around $6.31, about $2.68 more than this time last year. A power outage at a refinery in the Chicago area is expected to send refined fuel prices even higher in the region.

"You are going to see a lot of $5 gas prices in places like Michigan, Ohio, Minnesota, Illinois, and Indiana," Gulf Oil chief energy adviser Tom Kloza told Yahoo Finance on Thursday.

For oil-importing economies such as India, higher oil prices raise import costs and add to inflation pressure, since fuel prices feed into transport and goods prices across the economy. Brent crude has now gained for three straight weeks, and traders are watching whether the geopolitical risk premium holds or fades with the next headlines from the region.