Global oil prices jumped to a three-week high Friday, extending the biggest weekly gain since February, amid escalating military tensions in the Gulf region and the threat of potential U.S. airstrikes on Iran.

President Donald Trump ordered, and then rescinded, an airstrike on military installations in Iran in the early hours of Friday, according to twin reports from the New York Times and the Washington Post. The planned strike was meant to counter the downing of a $130 million Northrup Grumann (NOC) - Get Northrop Grumman Corporation Report made drone patrolling the Gulf of Hormuz on Thursday. Trump had said that Iran had made a "big mistake" and warned of consequences to follow, but appeared to pull back from executing a military response only hours before U.S. jets were set to take off.

Oil prices, which have risen more than 6% this week, were given further support from Energy Department data showing that U.S. crude stocks fell by a bigger-than-expected 3.11 million barrels last week and suggestions that OPEC members will extend their agreement on production cuts, which are taking 1.2 million barrels from the market each day, when cartel members meet early next month in Vienna.

"We continue to believe amid this growing tension in the Middle East, along with expectations of an OPEC+ deal extension, that oil prices will trend higher over the second half of the year," said ING's head of commodity strategy Warren Patterson. "A weaker US dollar, with a more dovish Fed only adds further support."

Brent crude contracts for August delivery, the global benchmark, were seen $1.21 higher from their Thursday close and changing hands at $65.66 per barrel in early New York trading, while WTI contracts for the same month, which are more tightly linked to U.S. gas prices, were marked 77 cents higher at $57.84 per barrel.

TheStreet Recommends

Gulf tensions certainly have the potential to send oil prices higher again next week, given that around a fifth of the world's oil passes through the nearby Strait of Hormuz, which separates the Persian Gulf states from Iran and the epicenter of military tensions between Washington and Tehran, each year.

However, with China's industrial economy running at the weakest pace in seventeen years, and U.S. drilling pumping a record 13 million barrel each day, the downdraft for global oil markets looks powerful.

The International Energy Agency cut its 2019 demand growth forecast Friday to 1.2 million barrels per day, noting that "the main focus is on oil demand as economic sentiment weakens", and adding that a "worsening trade outlook" was a common theme around the regions it covered in its monthly outlook report.

Those views were echoed by the U.S. Energy Information Administration, which said Wednesday that U.S. supplies rose by 2.21 million barrels in the week ending June 7 to take the overall supply tally to 485.47 million barrels, the highest in nearly two years.

The EIA also trimmed its forecast for world demand yesterday to around 1.22 million barrels per day in its regular Short-Term Energy Outlook report, a 160,000 reduction from its prior forecast. It also lowered its growth estimate for 2020 by 110,000 to 1.42 million barrels per day.

OPEC's monthly report, which was published Thursday, also noted "significant downside risks from escalating trade disputes spilling over to global demand growth remain."