Geopolitical Risks Bolster Crude Markets as Supply Concerns Mount

Price Action and Market Recovery

Crude oil and gasoline futures reversed Thursday’s decline on Friday, with February WTI crude oil advancing +0.25 (+0.42%) and February RBOB gasoline rising +0.0014 (+0.08%). The recovery reflects renewed risk-off sentiment, though price momentum weakened as the US dollar rebounded from early session lows.

Middle East Tensions Underpin Oil Support

Geopolitical risks remain the primary force underpinning crude valuations. Escalating unrest in Iran—OPEC’s fourth-largest producer generating over 3 million barrels per day—has triggered mass protests across major cities. With thousands of demonstrators taking to the streets over currency crisis and economic collapse concerns, Iranian security forces have escalated responses. The situation has prompted President Trump to signal potential military intervention if government violence against protesters continues.

Military buildup by the US underscores the elevated risk environment. According to Fox News, an aircraft carrier strike group is being repositioned to the Middle East, with additional military assets expected to deploy in coming weeks. Previously, Reuters reported that US personnel have received advisories to depart the Al Udeid Air base in Qatar—the same facility Iran targeted during retaliatory strikes last year following US operations against Iranian nuclear infrastructure.

Supply-Side Pressures Compounding Support

Beyond Middle Eastern tensions, crude’s technical fundamentals remain buttressed by multiple supply disruptions. Ukrainian drone and missile operations have targeted at least 28 Russian refineries over the past four months, constraining Moscow’s export capability. Concurrent attacks on Russian tankers in the Baltic Sea—at least six vessels struck since November—further restrict crude logistics. These actions, combined with fresh US and EU sanctions targeting Russian petroleum infrastructure and vessel fleets, have significantly curtailed Russian crude flows to global markets.

On Russia’s Black Sea Coast, drone strikes this week impacted the Caspian Pipeline Consortium terminal, reducing loadings by nearly 50% to approximately 900,000 bpd.

Production Outlook and OPEC+ Strategy

OPEC+ has elected to maintain its production pause through Q1 2026, despite raising output by 137,000 bpd in December 2025. This measured approach reflects a recalibration of global supply-demand dynamics. OPEC’s December crude production climbed 40,000 bpd to 29.03 million bpd, though the organization still must restore 1.2 million bpd of production to complete its 2.2 million bpd reduction commenced in early 2024.

Demand Fundamentals and Inventory Dynamics

Chinese crude demand is providing countervailing support. Kpler data indicates China’s December imports are positioned to climb 10% month-over-month to a record 12.2 million bpd as the nation rebuilds strategic reserves.

On the inventory side, mixed signals emerged from the EIA’s latest report (through January 9): US crude stockpiles sat 3.4% below the 5-year seasonal average, while gasoline inventories exceeded the seasonal norm by 3.4%. Distillate inventories registered 4.1% below seasonal averages. US crude production dipped 0.4% week-over-week to 13.753 million bpd, marginally below the November 7 record of 13.862 million bpd.

Rig Activity and Forward Guidance

Baker Hughes reported that active US oil rigs rose by 1 unit to 410 in the week ended January 16, marginally above the 4.25-year low of 406 rigs posted in December. The steady-state rig count reflects the sector’s retrenchment from the December 2022 peak of 627 rigs—a 34% contraction over 2.5 years.

The IEA projects global crude surplus will widen to a record 3.815 million bpd in 2026, up from over 2.0 million bpd in 2025. Meanwhile, the EIA raised its 2026 US crude production forecast to 13.59 million bpd while reducing energy consumption guidance to 95.37 quadrillion BTU.