Oil Prices Face Pullback as Profit Taking and Stronger Dollar Converge

After capturing gains over the preceding three trading sessions, crude oil retreated on Friday as the momentum shifted. WTI crude oil for March delivery settled down $0.22, or approximately 0.34%, ending the session at $65.20 per barrel. This reversal stems from multiple converging pressures: traders executing profit taking strategies, an appreciating U.S. dollar, and emerging hopes for diplomatic resolution in the U.S.-Iran standoff.

Market Mechanics: Why Traders Lock In Gains

The pullback reflects a classic pattern in commodity markets. After substantial gains accumulate, profit taking naturally emerges as traders decide to secure their returns rather than hold through additional volatility. This profit taking activity, combined with the U.S. Dollar Index rising 0.49% to 96.75, creates a headwind for oil prices. Since crude is priced in dollars, a stronger greenback makes oil more expensive for foreign buyers, dampening demand pressures.

Geopolitical Tensions and Policy Uncertainty Temper Rally

Domestic policy uncertainty added another layer of complexity. The U.S. government faces a potential partial shutdown, with Congress scrambling to pass financing bills before midnight. Meanwhile, the Trump administration’s Federal Reserve nomination announcement—designating former Governor Kevin Warsh to potentially succeed Jerome Powell—introduced fresh complexity. Warsh’s reputation as a higher-rate advocate contradicts Trump’s stated preference for lower rates, catching market analysts off guard.

Internationally, the situation remains precarious. Despite Trump’s hardline warnings toward Iran regarding its nuclear program, Tehran has maintained its defiant stance. Iran’s announced “live-fire drills” near the Strait of Hormuz—a critical chokepoint accounting for substantial global oil transit—raised concerns about potential supply disruptions among traders and maritime operators. However, diplomatic efforts by Turkey to mediate between Washington and Tehran provided some market relief, suggesting profit taking on reduced geopolitical risk perception.

Global Demand Signals and Strategic Shifts

Recent inventory data provides mixed signals. The U.S. Energy Information Administration reported that commercial crude oil inventories declined by 2.3 million barrels during the week ending January 23, signaling steady domestic consumption. However, broader global dynamics paint a complex picture. China’s crude oil imports surged to unprecedented levels last year, approaching 11.55 million barrels per day annually. December 2025 figures showed imports at 2.67 million barrels per day, a substantial jump from November’s 1.88 million bpd—demonstrating robust Asian demand.

The Venezuelan factor introduces yet another variable. Following recent U.S. military operations and subsequent political transitions, the Trump administration has begun easing sanctions on Venezuela’s oil sector, facilitating American companies’ crude purchases. Venezuela’s new leadership adjusted hydrocarbon policies to grant private entities greater control over production and sales, benefiting U.S. energy interests. Meanwhile, Russia’s agreement to pause military operations on Ukraine through February 1 reduces one geopolitical risk factor, though territorial negotiations between Moscow and Kyiv remain deadlocked.

These interconnected forces—profit taking, dollar strength, diplomatic opportunities, policy uncertainty, and shifting global supply dynamics—collectively shaped oil’s Friday performance, suggesting traders are recalibrating risk assessments across multiple dimensions.