Oil heads for weekly climb on potential Mideast supply disruption

Oil prices softened on Friday but were set for a second weekly gain as investors weighed the impact of hurricane damage on U.S. demand against any broad supply disruption if Israel attacks Iranian oil sites.

Brent crude oil futures were down 73 cents, or 0.9%, at $78.67 a barrel by 1208 GMT. U.S. West Texas Intermediate crude futures slipped 71 cents, also 0.9%, to $75.14 per barrel.

For the week, both benchmarks were headed for gains.

"A potential Israeli attack on Iranian oil... infrastructure poses a binary outcome for oil markets, as it could reduce the elevated spare capacity overhang on prices while inducing a significant geopolitical risk premium, which explains the recent surge in oil market volatility," Barclays said in a client note.

Yeap Jun Rong, market strategist at IG, said reservations over high crude inventories and a possibly more gradual monetary easing by the U.S. Federal Reserve have put the recent rally on hold.

In the U.S., Hurricane Milton plowed into the Atlantic Ocean on Thursday after cutting a destructive path across Florida, killing at least 10 people and leaving millions without power. The destruction could dampen fuel consumption in some areas of the world's largest oil producer and consumer.

Crude benchmarks spiked this month after Iran launched more than 180 missiles against Israel on Oct. 1, raising the prospect of retaliation against Iranian oil facilities. Israel has yet to respond, and crude benchmarks have eased and remained relatively flat through the week.

Israeli Defence Minister Yoav Gallant has said that any strike against Iran would be "lethal, precise and surprising".

Iran is backing several groups fighting Israel, including Hezbollah in Lebanon, Hamas in Gaza and the Houthis in Yemen.

Gulf states, meanwhile, are lobbying Washington to stop Israel from attacking Iran's oil sites out of concern their own oil facilities could come under fire from Tehran's proxies if the conflict escalates, three Gulf sources told Reuters.

On the supply side, Libya's National Oil Corporation said on Thursday it had restored production close to levels before the country's central bank crisis, reaching 1.22 million barrels per day.