Oil prices slid by more than two per cent on Thursday on worries that inflation and a slowing economy could weigh on oil demand even as the growing conflict between the US and Iran limits supply by delaying a full reopening of the Strait of Hormuz.
About 20 per cent of global oil supplies passed through the strait before the Iran war. Brent futures fell $1.92, or 2.5 per cent, to $76.10 a barrel at 13:26 EDT (17:26 GMT). US West Texas Intermediate crude fell $1.61, or 2.2 per cent, to $71.91.
On Wednesday, Brent closed at its highest since June 19 and WTI closed at its highest since June 22.
Iranian armed forces launched attacks on US military infrastructure in Persian Gulf states on Thursday following US strikes on Iran's southern coastal and eastern provinces, further straining a three-week-old ceasefire agreement.
The attacks came on the day that Iran buried its slain Supreme Leader Ayatollah Ali Khamenei at the shrine of Mashhad, the culmination of a week of mass funeral processions and rallies.
Khamenei was killed on the first day of the war on February 28.
"We expect the renewed tension in the Middle East between the US and Iran to be relatively short-lived because both countries are constrained by practical economic and political realities," Vikas Dwivedi, global energy strategist at Macquarie Group, said in a note.
Iran's Revolutionary Guards Navy said the US attacks and intervention in redirecting shipping through the Strait of Hormuz were disrupting the waterway's gradual reopening.
"Our estimated oil flows from the Persian Gulf recovered to above 80 per cent of pre-war flows within the first 10 days after Hormuz reopening as trapped tankers rushed to leave the Persian Gulf, but retreated to the low-70s per cent of normal following recent attacks on tankers," analysts at US bank Goldman Sachs said in a report.
In the US, the number of Americans filing claims for unemployment benefits fell last week, supporting economists' views that the labour market remained in a "slow-hire, slow-fire" mode, despite a sharp slowdown in job growth in June.
Minutes of the Federal Reserve's June 16 to 17 meeting showed policymakers' concerns about inflation mounted last month and they, "generally expected labour market conditions to remain stable in the near term, with the unemployment rate staying close to current levels."
New York Federal Reserve President John Williams said on Thursday he did not expect a sustained rise in energy prices for the rest of the year despite the resumption of hostilities in the Middle East, and declined to say what decision he would make on interest rates at a policy meeting later this month. When the Fed boosts interest rates to keep inflation in check, it can reduce economic growth and cut demand for oil.
In China, the world's second-biggest economy behind the US, producer price inflation surged in June to its highest level in four years, piling pressure on manufacturers' profit margins as weak domestic demand limited pricing power.
China and Taiwan, meanwhile, were bracing for a tropical storm that could be the most destructive in years as Typhoon Bavi churned southeast of Taiwan on Thursday, with winds near 200 kph (124 mph). Parts of China were still reeling from Typhoon Maysak.
In Europe, Ukrainian drones hit a dozen more Russian tankers in the Sea of Azov overnight, Ukraine's military said on Thursday, the latest in a campaign aimed at disrupting fuel supplies to Russian forces and isolating Moscow-occupied Crimea.
On Wednesday, US diesel futures posted their biggest daily percentage gain in four years after Russia announced a ban on exports of the industrial fuel, supercharging supply concerns in a market grappling with uncertainty about Middle Eastern oil flows.
Russia said the US was wrong to believe deep Ukrainian strikes into Russian territory could help end more than four years of war, and could instead prolong it.
A settlement in the Ukraine war could result in the lifting of some sanctions on Russia, which could allow Moscow to export more oil.
Russia was the world's third-biggest crude oil producer behind the US and Saudi Arabia in 2025, according to US energy data.
Elsewhere in Europe, the European Union plans to introduce a raft of policies and funding schemes to shift more of its economy to run on electricity, instead of oil and gas, a draft European Commission proposal seen by Reuters showed. If successful, the plan could reduce oil demand in Europe.
(Reporting by Scott DiSavino in New York, Anushree Mukherjee in Bengaluru, Sam Li, Trixie Yap and Shariq Khan; Additional reporting by Stephanie Kelly; Editing by Barbara Lewis, Paul Simao, Mark Potter, Nia Williams and David Gregorio)