Crude Oil on Fire: Geopolitical Factors Drive Oil Prices to New Monthly Highs

Energy Markets React to Iranian Unrest

Crude oil prices have experienced a sharp surge in recent sessions. February WTI futures increased by 3.10%, while related RBOB gasoline derivatives gained 2.00%, with both assets hitting their highest levels in the past month. This bullish movement in the energy sector mainly reflects the escalation of tensions in Iran, an OPEC country that is a cornerstone of global crude oil production.

The intensification of internal Iranian unrest has brought supply disruption risks into focus. With Tehran producing over 3 million barrels per day, any deterioration in the situation could cause significant shocks to global markets. The US leadership also contributed to the heightened atmosphere with warnings directed at Iranian authorities regarding the safety of protesters.

US Economic Data Reinforces Bullish Narrative

Alongside geopolitical tensions, US economic fundamentals have supported the expected energy demand. December’s unemployment rate unexpectedly fell to 4.4%, beating estimates, while the University of Michigan consumer confidence index accelerated to 54.0 points in January, surpassing expectations.

These signs of economic robustness suggest a more sustained energy demand in the coming months. Additionally, the crack spread for refined products reached a three-week high, encouraging refineries to increase crude oil acquisitions to expand gasoline and distillate production.

Global Supply Side Pressures

The critical factor for global supplies comes from a different front: Ukrainian attacks on Russian oil infrastructure. Over the past four months, at least 28 refineries have been hit, reducing Moscow’s export capacity. Russian tankers in the Baltic Sea have also been targeted, with at least six ships damaged since November.

Meanwhile, Saudi Arabia has cut its Arab Light crude contract prices for February delivery for the third consecutive month, signaling caution about future demand.

OPEC+ Production Context and Market Outlook

OPEC+ confirmed its decision to maintain a pause on production increases until the first quarter of 2026, after adding 137,000 barrels per day in December. The stockpiled crude oil on stationary tankers decreased by 3.4% week-over-week, reaching 119.35 million barrels as of January 2.

However, medium-term outlooks show a different picture. Morgan Stanley revised its forecasts downward, projecting a wider global crude surplus that could peak mid-year. According to the bank, crude prices in the first quarter could settle at $57.50 per barrel, with further compression to $55 in the second quarter.

Chinese Demand Remains a Fundamental Driver

China continues to support global oil demand. Chinese imports in December are expected to increase by 10% month-over-month, reaching a record 12.2 million barrels per day. The Asian country is gradually rebuilding its strategic reserves.

The International Energy Agency (IEA) forecasted a record surplus of 4 million barrels per day in 2026, while OPEC expects a surplus of 3.815 million barrels per day in the same period, up from an estimated 2 million in 2025.

US Production and Inventory Dynamics

In the US, crude oil production for the week ending January 2 remained nearly stable at 13.811 million barrels per day, slightly below the record reached in November. The EIA raised its US production estimate for 2025 to 13.59 million barrels daily.

Domestic inventories show a mixed picture: crude stocks are 4.1% below the multi-year seasonal average, while gasoline inventories exceed the historical level by 1.6%, and distillates are in a 3.1% deficit. Baker Hughes reported an increase in active US oil rigs, rising to 412 in the week considered, marking a gradual recovery from the lows of the past 4.25 years.

Outlook and Index Rebalancing

The annual rebalancing of major commodities indices is expected to generate further crude oil buying. Citigroup estimates inflows of $2.2 billion into oil futures next week as a result of this recalibration process.

Overall, crude oil continues to navigate between upward pressures driven by geopolitical tensions and solid US fundamentals, counterbalanced by future surplus prospects and cautious OPEC producer stance. The US dollar has reached a four-week high, adding a complicating factor for dollar-denominated assets.