Oil closed at its highest settling price this year as increasing tensions in the Middle East outweighed hotter-than-expected U.S. inflation data that’s damping the prospect of interest rate cuts.

West Texas Intermediate rose above US$79 a barrel after Hezbollah chief Hassan Nasrallah said the group will escalate its fight with Israel, heightening risks in a region that accounts for about a third of the world’s oil output. Meanwhile, wider markets struck a more cautious tone as inflation figures spurred bets that the Federal Reserve will be in no rush to cut interest rates.

Apart from the conflict, the fundamental outlook for crude remains mixed. The International Energy Agency said this week that oil markets could be in surplus all year as global demand growth loses steam, while OPEC sees more robust consumption and the cartel and its allies are implementing supply cuts to buttress prices. Crude is up more than 10 per cent this year, near the top of the range it has traded in since early November.

“Oil prices have been quite choppy this week, partly because of the dollar strength holding it back, after last week’s sizeable rally,” Fawad Razaqzada, a market analyst at City Index and Forex.com, said in a note to clients. “All told, I think risks are skewed to the upside for oil, as there not many negative influences to impact prices.”

In the Middle East, exchanges of fire between Hezbollah in Lebanon and Israel intensified in a further escalation that’s raising alarm of a wider war. Security in the Red Sea continues deteriorate as swaths of the merchant fleet have been avoiding the waterway since attacks by the Houthis began in mid-November.

Meanwhile, Russia almost reached its target for voluntary supply reductions for the first time since making the pledge last year, according to Bloomberg calculations based on official data for January. Elsewhere, Iraq and Kazakhstan have pledged compliance with their targets after failing to fully cut production as promised last month.

Prices:

• WTI for March rose $1.16 to settle at $79.19 a barrel in New York.
• Brent for April settlement rose 61 cents to settle at $83.47 a barrel.