Oil prices retreat on Friday but post strong weekly gains amid Middle East tensions

Oil prices retreated on Friday, but notched sharp weekly gains after soaring above $100 a barrel for the first time in months.

Brent crude oil futures , the global benchmark, settled down 2.8% at $104.61 a barrel. U.S. West Texas Intermediate was down 2.4% to settle at $100.05 per barrel. On Thursday, Brent crude peaked at around $108 a barrel, while WTI hit more than $104.

The price decline came after Iranian state media said Tehran will meet with Gulf states in Oman to discuss the Strait of Hormuz, indicating some diplomacy is taking place despite a week of sharp escalation.

Brent futures posted a weekly gain of 8.7%, ending the week above the critical $100 mark. WTI's week-to-date gain came in at 9.4%. Friday's decline snapped five consecutive days of gains for Brent crude and an eight-day winning streak for WTI.

Markets are bracing for a protracted Iran war, reacting to the escalating conflict in the Middle East and a Wall Street Journal report that said top White House advisors had discussed with President Donald Trump the possibility that the hostilities could drag on beyond his current term.

Trump has said that the conflict will end after the U.S. midterm elections, and that oil and gas prices will also fall after the critical vote in November.

"Once again, it is geopolitical fears driving everything," Deutsche Bank's Jim Reid said in a Friday morning note. "In terms of the latest Middle East headlines, yesterday saw growing concerns over the safety of Red Sea shipping, and the potential knock-on effects for Saudi oil exports, as Houthi rebels captured Yemen's port city of Mokha, which is located close to the Bab el-Mandeb Strait on the southern end of the Red Sea. The mood also wasn't helped by news that Saudi Arabia's oil output has fallen to its lowest since 1990."

Tamas Varga, an analyst at PVM Oil Associates, told CNBC that the question for investors was whether the current supply deficit is structural or transitory.

"While further spikes cannot be ruled out and re-visiting the April peak of $126 remains a possibility as global and regional oil inventories keep drawing down, it must be noted that [the] higher oil prices climb, the more demand will be obliterated," he said. "The difference between the current crisis and ... the one experienced in 1990, during the first Gulf War, is that today oil is more elastic than 35 years ago."

Varga said renewable energy is "more than capable" of replacing "certain parts of the barrel," especially in electricity generation.

"It appears only a question of time that the gap between global oil supply and demand will narrow, either by supply increasing in case of a truce or demand decreases, due to the widespread use of alternative energy sources," he added. "In the interim, further oil price strength is very much possible, but it would be surprising to see it lasting beyond 2026."

Correction: U.S. West Texas Intermediate was down 2.75% to $99.66 per barrel. An earlier version misstated the direction of the price.