Oil prices steady as US-Iran talks offset rising Middle East supply fears

Oil prices were little changed on Friday, with benchmark crude posting only modest gains as investors balanced optimism over ongoing US-Iran negotiations against rising Middle East oil supplies and persistent concerns about global demand.

Brent crude futures rose 0.19%, to $71.94 a barrel, while US West Texas Intermediate (WTI) crude edged up 0.13% to $68.78.

Despite Friday's gains, both benchmarks were broadly unchanged for the week after falling to their lowest levels since before the US-Israeli conflict with Iran began in late February.

US financial markets remained closed on Friday ahead of the Independence Day holiday.

Peace talks support market sentiment

Investor sentiment continued to be influenced by diplomatic efforts between the United States and Iran, with hopes that negotiations could help stabilize oil flows through the Strait of Hormuz.

According to Commerzbank analysts, expectations for a full reopening of the strategic waterway have been supported by the ongoing talks.

"The US-Iran dealmaking process remains fragile but continues for now, as the question of Strait of Hormuz tolls and administration remains contentious," Citi analysts wrote.

"We expect the MoU (memorandum of understanding) to hold, not because trust has suddenly emerged, but because the incentives to break are poor for both sides," Citi analysts said.

Although indirect negotiations in Doha did not produce a lasting agreement, US President Donald Trump said on Thursday that Iran had "accepted nearly everything we require," while Qatar reported positive progress in discussions.

At the same time, geopolitical risks remain elevated. Iran's joint military command warned that any US interference in the Strait of Hormuz would trigger a "decisive and swift response."

Supply recovery weighs on crude prices

As shipping activity through the Strait of Hormuz gradually resumes, Gulf producers have moved to increase oil output, adding to expectations of stronger near-term supply.

Kuwait's crude production rose to 1.65 million barrels per day in June from 580,000 barrels per day in May, according to a source familiar with the matter.

Meanwhile, at least five supertankers carrying around 10 million barrels of Saudi crude have exited the Strait of Hormuz, while Saudi Aramco has shifted from longer-term contracts to spot pricing to accelerate sales into Asia.

"A sustained recovery in crude prices is more likely to materialise once the oil currently stranded on tankers and held in storage has been absorbed by the market, and if the recovery in production proves insufficient to offset volumes transiting the Strait of Hormuz," PVM analyst Tamas Varga said.

Rory Johnston, founder of the Commodity Context newsletter, also noted that increasing regional production is outpacing expectations.

"Overall, the recovery in Middle Eastern supply is outpacing our initial expectations while Chinese-depressed import demand remains weak," Johnston said.

Contango signals ample near-term supply

The recovery in supply has altered the structure of the oil futures market.

Brent crude has moved into contango, with prompt contracts trading below later-dated contracts.

The spread between front-month Brent and the six-month forward contract turned negative on July 1 for the first time this year, reflecting expectations of ample supplies and softer near-term demand.

"The newly released crude is chasing demand that has already been reduced and met, and that is precisely why the front of the curve is taking the hit," ICIS global oil markets lead David Jorbenaze said.

Analysts noted that contango can encourage traders to place crude into storage if the price difference becomes large enough to cover storage and financing costs.

Meanwhile, weaker-than-expected US employment data also provided some support to oil prices.

June nonfarm payrolls increased by just 57,000, reducing expectations of additional Federal Reserve interest rate hikes and weakening the US dollar, which typically supports dollar-denominated commodities such as crude oil.

Commerzbank said current price weakness reflects expectations of future oversupply rather than evidence of an already oversupplied market, adding that upcoming forecasts from the US Energy Information Administration and future OPEC+ production decisions will remain key drivers for oil prices.