Oil Prices Set for Biggest Monthly Gain in Years

Oil prices are on track for their most significant monthly surge in years, driven by escalating tensions in the Middle East over a potential U.S. conflict with Iran that could threaten global energy supplies.

While both major benchmarks saw a slight pullback on Friday, their monthly performance remains exceptionally strong. Brent crude futures dipped 21 cents to $70.50 a barrel, and the more active April contract fell 37 cents to $69.22. U.S. West Texas Intermediate (WTI) crude saw a 39-cent drop to $65.03 per barrel.

Despite the minor decline, both benchmarks are poised to break a five-month losing streak.

• Brent crude is set for a monthly gain of over 16%, its largest jump since January 2022.

• WTI crude is on pace to rise more than 14% in January, marking its biggest monthly increase since July 2023.

Geopolitical Risk Fuels Market Jitters

The primary driver behind the price surge is the heightened risk of conflict between the United States and Iran. U.S. President Donald Trump on Wednesday called for Iran to negotiate on its nuclear program or risk a military strike, prompting a sharp response from Tehran.

This standoff has injected a significant "risk premium" into oil prices. According to IG market analyst Tony Sycamore, traders are now pricing in the possibility of major disruptions to Iranian oil exports or a shutdown of shipping through the vital Strait of Hormuz.

Adding to the tension, the Trump administration is reportedly holding separate talks in Washington this week with senior defense and intelligence officials from Israel and Saudi Arabia to discuss Iran. While U.S. officials state that President Trump is still reviewing his options, the military buildup in the region has put the market on high alert.

Analysts Question Scale of Potential Disruption

Despite the heated rhetoric, some analysts believe a full-scale disruption to Iran's oil infrastructure is unlikely. Analysts at JPMorgan, led by Natasha Kaneva, noted that "elevated inflation and this year's mid-term elections" in the U.S. make a prolonged conflict undesirable.

Their analysis suggests that if military action does occur, it would likely be "targeted, avoiding Iran's oil production and export infrastructure." This view is shared by Citi, which estimates a 70% probability that the U.S. and Israel will opt for more restrained actions against Iran in the near term, such as limited strikes and oil tanker seizures.

Global Supply Issues Tighten the Market

Beyond the Middle East, a series of unrelated supply disruptions have further tightened the global oil market, collectively removing an estimated 1.5 million barrels per day (bpd) in January, according to JPMorgan.

Key supply challenges include:

• Kazakhstan: The massive Tengiz oilfield is slowly restarting production after electrical fires impacted 7.2 million barrels of output. It is expected to take a week to return to full capacity.

• United States: An Arctic weather wave is projected to reduce crude and condensate output by 340,000 bpd this month.

• Russia: Bad weather has hampered the country's oil exports.

• Venezuela: The nation was forced to cut production after U.S. forces ousted President Nicolas Maduro.

However, the situation in Venezuela is evolving. The new interim government approved a major reform of its oil law on Thursday, while the Trump administration eased some sanctions on the country's oil industry. These moves are designed to encourage investment and could eventually lead to an increase in Venezuela's oil and gas output.