Oil price increase driven by geopolitical conflict and strong demand

Market Disruptions in the Fuel Sector: When Geopolitics Meets Economics

The dynamic rise in fuel prices on futures markets reflects tension between destabilized supply and increasing demand. February contracts for WTI crude oil have risen by 3.10% today, while RBOB gasoline futures increased by 2.00%. Both commodities reached their highest levels in a month, indicating growing optimism among buyers. Although the US dollar index hit its highest level in four weeks, the strength of demand proved stronger than the pressure from currency appreciation.

Geopolitical Issues as the Main Driver of Oil Price Increases

Escalating unrest in Iran, one of the key OPEC members, is the primary factor driving current gains. Iran produces over 3 million barrels per day, and any disruption in its distribution system could potentially impact global raw material flows. Government announcements of strict sanctions against protesters and harsh words from the US administration toward Iranian leaders deepen market concerns about potential supply interruptions.

Additionally, Ukrainian operations targeting Russian refinery infrastructure have significantly narrowed Russia’s export capacity. Over the past four months, at least 28 drone and missile attacks have targeted refinery facilities, and at least six Russian tankers have been hit in the Baltic Sea since late November. New sanctions imposed by the US and EU further restrict export capabilities.

US Economic Data Support Energy Demand Outlook

The economic momentum from North America is the second pillar supporting prices. The unemployment rate in December fell to 4.4%, surpassing analyst forecasts, suggesting continued strength in the labor market. Simultaneously, the University of Michigan consumer sentiment index for January rose to 54.0, well above expectations. Historically, such indicators are associated with increased demand for fuels and diesel.

The refinery sector reacts positively to more attractive crack spreads, which have reached a three-week high. This encourages refineries to ramp up raw material purchases and increase production of derivative products. Citigroup estimates that the annual rebalancing of major commodity indices, particularly BCOM and S&P GSCI, will attract around $2.2 billion into the crude oil futures market in the coming days.

Asian Demand Remains a Buffer for Absorption

China continues to show strong appetite for raw materials. December crude oil imports into the country are estimated to have reached 12.2 million barrels per day — a 10% month-over-month increase — accompanied by replenishment of domestic strategic reserves. This absorption provides significant support for oil prices, especially as OPEC production struggles with disruptions.

Pressure from the Other Side: Overcapacity Forecasts and OPEC Tactics

However, there are factors restraining price increases. Saudi Arabia has lowered its Arab Light crude oil prices for February deliveries for the third consecutive time, signaling concerns about declining energy demand. Morgan Stanley revised its forecast, indicating the possibility of a significant global oil surplus, which could peak mid-year. The bank shifted its Q1 outlook to $57.50 per barrel from earlier $60, and Q2 to $55 from previously $60.

OPEC+ continues to maintain a hold on production increases until the first quarter of 2026. After increasing output by only 137,000 barrels per day in December, the cartel is holding back further hikes, anticipating a coming global surplus. At the same time, the organization is gradually restoring the 2.2 million barrels per day reduction, of which 1.2 million barrels per day still awaits reinstatement.

Distinctive Trends in Benchmark Markets

US crude inventories as of January 2 remained 4.1% below the five-year seasonal average, while gasoline stocks were 1.6% above that average, and distillate inventories fell 3.1% below normal. US crude production decreased by 0.1% to 13.811 million barrels per day in the week ending January 2. Baker Hughes reported an increase of three active oil rigs to 412, bouncing from a 4.25-year low, though still far from the five-year maximum of 627 in December 2022.

The International Energy Agency forecasts a historic surplus of 4 million barrels per day in 2026, while OPEC’s latest update expects a surplus of 500,000 barrels per day in Q3, compared to an earlier forecast of a deficit of 400,000 barrels per day. The EIA has also raised its US oil production estimates for 2025 to 13.59 million barrels per day.

Summary: The Battle Between Support and Pressure

The current dynamics of the oil market illustrate a fundamental tension between decreasing supply and potentially rising demand. While geopolitical threats and strong economic fundamentals support prices, forecasts of upcoming surpluses and the conservative stance of OPEC+ suggest that growth may be limited. Market observers should watch closely over the coming weeks to see whether oil prices hold current levels or give way to the pressure of an anticipated first-half surplus.