Oil fell below $US65 a barrel overnight in its first weekly loss since late November, erasing the week’s risk premium added since a US drone strike killed a top Iranian general as investors focused on rising US inventories and other signs of ample supply.

However, markets were still eyeing the longer-term risks of conflict, and prices were briefly supported on Friday by new US sanctions on Iran in retaliation for its missile attack on US forces in Iraq.

Also, a Russian navy ship “aggressively approached” a US Navy destroyer in the North Arabian Sea on Thursday, the US Navy’s Bahrain-based Fifth Fleet said in a statement on Friday.

Brent crude, the global benchmark, settled at $US64.98, down 39 US cents. West Texas Intermediate crude fell 52 US cents to end at $US59.04.

“With the standing down of Iran there was a sense that oil supplies were pretty safe but now with the institution of sanctions and this report that a Russian ship was acting aggressively toward a US ship, it’s put a little bit of fear back into the market place,” said Phil Flynn, oil analyst at Price Futures Group in Chicago.

For the week, Brent had a 5.3 per cent loss and WTI had a 6.4 per cent decline, with both benchmarks now below where levels were before the US drone strike killed Iranian general Qassem Soleimani on January 3.

Iran responded to the US drone strike on January 8 with a missile attack on Iraqi air bases hosting US forces that left no casualties. But a Revolutionary Guards commander said Iran would take “harsher revenge” soon.

Still, there has been no disruption to Middle East oil production as a result of the flare-up in tensions and other indications this week suggest supply is ample.

US government data on Friday showed job growth slowed more than expected in December.

Crude inventories in the United States rose unexpectedly last week and gasoline inventories surged by their most in a week in four years, the Energy Information Administration said on Wednesday.

“We’re heading into a slack (fuel) demand period ahead of the summer driving season and rising inventories reminded folks this is still a somewhat oversupplied oil market,” said John Kilduff, partner at Again Capital LLC in New York.

In a bid to tackle any build-up of excess supply, the Organisation of the Petroleum Exporting Countries plus allies including Russia are embarking on a further cut in production as of January 1 this year.

Industry surveys, including from Reuters, showed that OPEC output declined in December ahead of the new pact. Still, production remains higher than the forecast demand for early 2020, according to some analysts.

But oil prices may find support in coming months due to improving fundamentals as the United States seems to have “plateaued on production, and OPEC is sticking with its cuts,” said Phil Streible, chief market strategist at Blue Line Futures in Chicago.