Geopolitical Risks Underpin Crude Oil Prices

February WTI crude oil (CLG26) on Tuesday closed up +1.65 (+2.77%), and February RBOB gasoline (RBG26) closed up +0.0327 (+1.82%).

Crude oil and gasoline prices rallied sharply on Tuesday, with crude posting a 2.25-month high and gasoline posting a 5-week high.  Crude prices surged on Tuesday after President Trump ramped up rhetoric over Iran, heightening concerns about oil supply disruption in OPEC's fourth-biggest producer.  Crude prices are also moving higher due to drone attacks that have led to disruptions at the Caspian Pipeline Consortium terminal that loads Kazakh oil into tankers along Russia's Baltic Coast.  

Unrest in Iran is boosting crude prices as thousands of protesters have taken to the streets in many cities of Iran to protest government policies that have triggered a currency crisis and economic collapse.  Iranian security forces have killed hundreds of protesters, and President Trump said that "help is on the way," and the military has briefed him on military options if Iran continues to kill protesters.  Iran produces more than 3 million bpd, and its crude production could be disrupted if the protests against the government worsen and the US decides to strike government targets.  

Crude is also finding support after drone attacks on oil tankers near the Caspian Pipeline Consortium terminal on Russia's Black Sea Coast have reduced crude loadings at the terminal by almost half to around 900,000 bpd.

The upcoming annual rebalancing of commodity indexes will lead to the purchase of oil contracts, a bullish factor for crude.  Citigroup projects that the BCOM and S&P GSCI indexes, the two largest commodity indexes, will see inflows of $2.2 billion in futures contracts this week to rebalance the indexes.  

Vortexa reported Monday that crude oil stored on tankers that have been stationary for at least 7 days fell -0.3% w/w to 120.9 million bbl in the week ended January 9.

Strength in Chinese crude demand is supportive for prices.  According to Kpler data, China's crude imports in December are set to increase by 10% m/m to a record 12.2 million bpd as it rebuilds its crude inventories.

Crude garnered support after OPEC+ on January 3 said it would stick to its plan to pause production increases in Q1 of 2026.  OPEC+ at its November 2025 meeting announced that members would raise production by +137,000 bpd in December, but will then pause the production hikes in Q1-2026 due to the emerging global oil surplus.  The IEA in mid-October forecasted a record global oil surplus of 4.0 million bpd for 2026.  OPEC+ is trying to restore all of the 2.2 million bpd production cut it made in early 2024, but still has another 1.2 million bpd of production left to restore.  OPEC's December crude production rose by +40,000 bpd to 29.03 million bpd.

Ukrainian drone and missile attacks have targeted at least 28 Russian refineries over the past four months, limiting Russia's crude oil export capabilities and reducing global oil supplies.  Also, since the end of November, Ukraine has ramped up attacks on Russian tankers, with at least six tankers attacked by drones and missiles in the Baltic Sea.  In addition, new US and EU sanctions on Russian oil companies, infrastructure, and tankers have curbed Russian oil exports.

Last month, the IEA projected that the world crude surplus will widen to a record 3.815 million bpd in 2026 from a 4-year high of over 2.0 million bpd in 2025.

The EIA on Tuesday raised its 2026 US crude production estimate to 13.59 million bpd from 13.53 million bpd last month, and cut its US 2026 energy consumption estimate to 95.37 (quadrillion btu) from 95.68 last month.

The consensus is that Wednesday's weekly EIA crude inventories will decline by -1.68 million bbl, and gasoline supplies will increase by +2.0 million bbl.

Last Wednesday's EIA report showed that (1) US crude oil inventories as of January 2 were -4.1% below the seasonal 5-year average, (2) gasoline inventories were +1.6% above the seasonal 5-year average, and (3) distillate inventories were -3.1% below the 5-year seasonal average.  US crude oil production in the week ending January 2 was down -0.1% w/w to 13.811 million bpd, just below the record high of 13.862 million bpd from the week of November 7.

Baker Hughes reported last Friday that the number of active US oil rigs in the week ended January 9 fell by -3 to 409 rigs, just above the 4.25-year low of 406 rigs posted in the week ended December 19.  Over the past 2.5 years, the number of US oil rigs has fallen sharply from the 5.5-year high of 627 rigs reported in December 2022.