Oil Prices Hit 4-Month High on Iran Tensions & US Supply Squeeze
Edward LawsonOil prices surged to four-month highs, propelled by escalating US-Iran tensions and severe US weather disruptions.
Oil prices surged to their highest levels in four months as markets grappled with a combination of escalating geopolitical risk and severe weather-related supply disruptions in the United States.
On Thursday, Brent crude futures for March delivery rose 2.2% to trade at $68.85 per barrel, after briefly touching $70.35, a peak not seen since late September. Meanwhile, West Texas Intermediate (WTI) crude futures gained 2.4%, reaching $64.72 a barrel and earlier clearing the $65 mark. Both oil benchmarks have climbed approximately 9% over the past week.
Geopolitical Risk Spikes on US-Iran Standoff
The primary driver behind the rally is mounting tension between the U.S. and Iran, which has injected a significant risk premium into the market. Traders are concerned that a potential conflict could disrupt crude output from a key Middle Eastern producer.
Recent reports indicated that U.S. President Donald Trump was considering new military actions against Iran, potentially targeting its leadership and nuclear facilities. This follows earlier calls for Tehran to renegotiate its nuclear program, which were rejected. The situation has been intensified by the arrival of U.S. warships in the Middle East, with Trump suggesting more naval assets are en route.
As the fourth-largest producer within OPEC, Iran's output of 3.2 million barrels per day is critical to global supply. Analysts at ING noted that while an immediate disruption to Iranian oil is a key concern, a wider escalation could endanger the nearly 20 million barrels of oil that pass through the Strait of Hormuz daily.
However, not all analysts see a conflict as inevitable. Kepler Cheuvreux argued in a note that the probability of a major supply disruption is low. They believe President Trump's main objective is a nuclear deal, not regime change, making a large-scale bombing campaign unlikely. While Kepler acknowledged that oil prices could continue to rise in the short term, they expect the gains to be temporary, lasting perhaps a couple of weeks.
Winter Storm Disrupts US Production and Shrinks Inventories
Adding to supply-side pressures, a severe winter storm has swept across the United States, bringing heavy snow and freezing temperatures that have disrupted domestic crude production.
An estimated 2 million barrels per day of oil production were taken offline over the past week, and exports from the Gulf Coast were also hampered. The impact of these disruptions is already visible in official data, with U.S. oil inventories showing an unexpectedly sharp decline.
According to government figures released Wednesday, U.S. oil stockpiles for the week ending January 23 fell by 2.295 million barrels. This drawdown significantly outpaced market expectations of a 0.2 million barrel drop.
A closer look at the data reveals the sources of this tightening supply:
• Imports: Dropped by 805,000 barrels per day.
• Exports: Increased by 901,000 barrels per day week-over-week.
• Production: Crude output in the Lower 48 states fell by an estimated 42,000 barrels per day.
• Refinery Activity: Operating rates at U.S. refineries declined by 2.4 percentage points to 90.9% of capacity.
