Geopolitical Headwinds and Supply Constraints Drive Crude Rally Forward

February WTI crude oil futures gained +0.25 (+0.42%) on Friday while February RBOB gasoline advanced +0.0014 (+0.08%), as both commodities bounced back from Thursday’s significant decline. The recovery was fueled by a combination of short covering activity and underlying structural support factors that continue to bolster prices despite near-term volatility.

Geopolitical Risk Premium Remains Intact

Iran-related tensions continue to anchor crude valuations at elevated levels. While immediate US military intervention risks have moderated, Washington is actively reinforcing its military posture in the Middle East by deploying an aircraft carrier strike group and repositioning additional defense assets to the region. This measured response reflects ongoing instability in Iran, OPEC’s fourth-largest producer, where widespread civil unrest has seen security forces suppress thousands of demonstrators protesting economic policies.

The potential for supply disruptions looms large given Iran’s current production capacity exceeding 3 million barrels per day. Any escalation of tensions or expanded US military action targeting government infrastructure could meaningfully constrain global crude availability. Additionally, Ukrainian drone and missile campaigns have damaged at least 28 Russian refineries over the past four months, directly limiting crude oil distillation capacity and restricting export flows. Ukraine has also intensified attacks on Russian tankers in the Baltic Sea, with at least six vessels struck since late November, further constraining seaborne exports.

Supply-Side Pressures Support Floor Under Prices

Recent infrastructure damage extends beyond refining capacity. Drone attacks on oil tankers near the Caspian Pipeline Consortium terminal on Russia’s Black Sea Coast have cut crude loadings by approximately half to around 900,000 barrels per day. Combined with fresh Western sanctions targeting Russian oil companies and maritime transport, these supply constraints are proving supportive for crude valuations.

OPEC+ has signaled commitment to managing production cautiously, confirming on January 3 that it will pause production increases throughout Q1 2026. While the cartel raised output by 137,000 bpd in December, it faces competing pressures: a projected global oil surplus of 4.0 million bpd for 2026 according to IEA forecasts made in mid-October, and an incomplete restoration of its earlier 2.2 million bpd production cut from early 2024.

Demand Growth in Asia Provides Counterbalance

Chinese crude demand strength is partially offsetting global surplus concerns. Kpler data indicates China’s December crude imports will surge 10% month-over-month to a record 12.2 million barrels per day as the nation replenishes strategic inventories. This demand impulse provides pricing support during a period of elevated supply availability elsewhere.

US Inventory Dynamics and Production Trends

The EIA’s latest weekly report revealed mixed inventory signals as of January 9: crude stockpiles sat 3.4% below the five-year seasonal average, suggesting underlying tightness at the end-user level. However, gasoline inventories exceeded seasonal norms by 3.4%, while distillate supplies fell 4.1% below average. US crude production edged down 0.4% week-over-week to 13.753 million barrels per day, remaining near record highs established in November.

The Baker Hughes rig count reflected marginal improvement, with active US oil drilling rigs rising by one to 410 units in the week ended January 16. This modest uptick still leaves the industry well below the 627-rig peak recorded in December 2022, reflecting the structural shift in producer capital discipline over recent years.

The convergence of geopolitical uncertainty, refining bottlenecks from military strikes, and constrained Russian exports continues to anchor crude oil prices despite fundamental headwinds from anticipated 2026 surpluses. Market participants remain watchful of developments in Iran while monitoring the pace of supply restoration as the year progresses.