Crude oil futures - Weekly outlook: March 5 - 9

Investing.com - Crude oil prices fell sharply on Friday, retreating from a ten-month high after comments from U.S. President Barack Obama eased concerns over a Western-led military strike against Iran and after Saudi Arabia denied rumors of a pipeline fire.

On the New York Mercantile Exchange, light sweet crude futures for delivery in April settled at USD106.58 a barrel by close of trade on Friday, falling 2.73% over the week, the first weekly drop in four.

Crude prices spiked to USD110.54 a barrel late in Thursday’s trading session after Iran’s Press TV reported of a pipeline explosion in Saudi Arabia’s oil-rich Eastern Provence.

However, prices retraced gains after Saudi Arabia’s Interior Ministry refuted the report by affirming that there had been no explosion or sabotage at oil facilities in the Qatif area, which is home to the Kingdom’s largest refinery.

Saudi Arabia and Iran are the two biggest producers in the Organization of Petroleum Exporting Countries and regional political rivals.

U.K. lender Barclays said in a report Friday that the reaction highlighted “the reduced ability of the market to absorb supply shocks or mere headlines of supply shocks, given the limited spare capacity and inventory buffers.”

Meanwhile, U.S. President Obama said Friday a pre-emptive military strike against Iran would generate “sympathy” for the country, easing concern that an attack would take place.

The comments came after U.S. Air Force Chief of Staff General Norton Schwartz said Wednesday that Washington has prepared military options to strike Iran's nuclear sites should conflict erupt.

Israeli Prime Minister Benjamin Netanyahu will meet with President Obama in Washington on March 5 to discuss Iran. The two countries have previously stated that all options are on the table in ensuring the Islamic Republic does not acquire atomic weapons.

There are fears that an escalation of hostilities between Israel and Iran could set off a conflict across the region and send oil prices skyrocketing.

Iran produces about 3.5 million barrels of oil a day, making it the second largest oil producer in the OPEC, after Saudi Arabia.

The stand-off between Iran and Western countries has dominated sentiment in the oil market for weeks, raising fears that the escalating row over Tehran's nuclear program could lead to an oil-export halt, a disruption to shipping traffic in the Strait of Hormuz or military conflict.

Oil prices came under further pressure on Friday from a broadly stronger U.S. dollar, as investors shunned riskier assets amid fresh concerns over the debt crisis in the euro zone.

The dollar index, which tracks the performance of the greenback versus a basket of six other major currencies, rose 0.82% to settle the week at 79.48, the highest since February 17. On the week, the index climbed 1.32%.

Dollar-denominated oil futures contracts tend to fall when the dollar gains, as this makes oil more expensive for buyers in other currencies.

The euro had come under broad selling pressure on Wednesday, after the European Central Bank allotted EUR529.5 billion in loans to 800 lenders in its second long-term refinancing operation, amid concerns that the action was equivalent to quantitative easing.

In contrast, the dollar strengthened broadly after Federal Reserve Chairman Ben Bernanke dampened expectations for a third round of monetary easing in testimony to Congress on Wednesday, after he acknowledged the recent improvement in the labor market and said that higher oil prices could push up inflation.

Elsewhere, on the ICE Futures Exchange, Brent oil futures for April delivery settled at USD123.63 a barrel by close of trade on Friday.

The Brent contract declined 1.32% over the week, with the spread between the Brent and the crude contracts standing at USD17.05 a barrel. It was Brent’s first weekly drop in five.

Brent futures surged to USD128.38 a barrel on Thursday, the highest since July 2008, on the back of the Saudi-pipeline-fire report.

Brent futures have rallied in recent weeks, as geopolitical and production issues in Iran, the North Sea, South Sudan, Syria and Yemen have led to tighter supplies.

In the week ahead, investors will be looking ahead to Friday’s data on U.S. non-farm payrolls, to gauge the strength of the country’s economic recovery. Market participants will also be continuing to watch developments in Europe, ahead of an interest rate announcement by the ECB on Thursday.

Oil traders will also continue to monitor lingering tensions between Iran and the West.