Geopolitical Tensions in Middle East Underpin Crude and Gasoline Rally

Oil markets are climbing today as investors weigh multiple bullish factors, with March WTI crude up 0.45% and March RBOB gasoline rising 1.00%. While prices remain below Thursday’s highs, the underlying support from geopolitical risks continues to prop up energy prices despite headwinds from a stronger US dollar and moderating rhetoric from President Trump regarding ongoing Iran negotiations.

Middle East Flashpoint Drives Oil Markets Higher

President Trump’s warning to Iran—make a nuclear deal or face military strikes—has become the primary engine underpinning crude prices this week. Thursday saw WTI crude touch a 4.25-month high and gasoline surge to a 2-month high after Trump signaled that US military assets deployed to the Middle East stood ready to act “with speed and violence, if necessary” if Iran refuses a deal. Such military posturing matters enormously for global oil markets: Iran ranks as OPEC’s fourth-largest producer, and any military action could cripple the country’s crude exports while potentially disrupting the Strait of Hormuz—the critical chokepoint through which roughly 20% of the world’s oil supply flows. This concentration of geopolitical risk underpins the current bid under crude prices, even as gains remain capped by Trump’s subsequent comments indicating overnight conversations with Iranian officials and expectations for continued dialogue.

Supply-Side Pressures Bolstering the Oil Rally

Beyond Middle East tensions, structural supply constraints continue to support the energy complex. Russia’s ongoing refusal to compromise on territorial demands in Ukraine means the Russia-Ukraine conflict will persist, keeping Western sanctions on Russian crude exports firmly in place. Ukrainian drone attacks have now targeted at least 28 Russian refineries over the past five months, with at least six tankers damaged by missiles and drones in the Baltic Sea since late November. These supply disruptions, combined with new US and EU sanctions targeting Russian oil infrastructure, have meaningfully reduced global crude availability—fundamentally underpinning prices from the supply side.

OPEC+ continues managing its production strategy carefully. The cartel announced January 3 that it would pause production increases throughout Q1 2026 despite global oil surplus pressures. This decision follows December’s modest rise of 40,000 bpd in OPEC crude output to 29.03 million bpd. Critically, OPEC+ still has 1.2 million bpd of production cuts remaining from its original 2.2 million bpd reduction initiated in early 2024, offering the organization additional levers to support prices if market conditions deteriorate.

Inventory Levels and Rig Activity Signal Mixed Demand Picture

Recent EIA data through January 23 paints a mixed inventory picture that continues to undergird oil prices. US crude inventories stand 2.9% below the five-year seasonal average—a supportive level that underpins price stability. Gasoline inventories, however, sit 4.1% above seasonal norms while distillate inventories run 1.0% above average, suggesting softer refined product demand. US crude production declined modestly to 13.696 million bpd, remaining just shy of November’s record of 13.862 million bpd.

Active US oil rigs tell a concerning longer-term story, with Baker Hughes reporting only 411 rigs in operation as of January 23—just above December’s 4.25-year low of 406. This represents a sharp contraction from December 2022’s five-year high of 627 rigs, underlining industry caution about future production growth. Weaker rig counts could limit crude supply growth ahead, another factor underpinning current price levels despite near-term demand softness.

The IEA’s latest forecast underscores why supply management remains critical: the agency trimmed its 2026 global crude surplus estimate to 3.7 million bpd from 3.815 million bpd previously, narrowing the glut and amplifying OPEC’s need for continued production restraint. This data backdrop ensures that geopolitical risks—particularly the Iran confrontation—continue to underpin crude and gasoline prices as markets grapple with the interplay between shrinking surplus capacity and mounting regional political uncertainty.