NEW YORK—Oil prices ended slightly higher Friday, pushing back above $125 a barrel as the threat of a conflict with Iran rattled energy markets after a week of wild swings.

The gains, however, were limited by lingering beliefs that fuel prices are still too high for cash-strapped Americans who are already cutting back on driving to save money.

In another sign of waning demand for gasoline, U.S. filling stations hungry for business lowered the price of a gallon of regular overnight by just over a penny on average to $3.898, according to auto club AAA, Oil Price Informati...