Oil prices climbed to their highest levels since late September this week, fuelled by a volatile mix of Middle East tensions, surprise supply disruptions, and a weakening U.S. dollar. Together, these forces reignited bullish momentum in energy markets that had been wavering just weeks ago.
At the heart of the rally is renewed anxiety over Iran. U.S. President Donald Trump urged Tehran to return to nuclear negotiations, warning that failure to do so could result in far more severe U.S. military action. Iran’s response was defiant, vowing unprecedented retaliation if attacked.
Adding to market unease, a U.S. aircraft carrier and accompanying warships have arrived in the Middle East, a move widely interpreted as a show of force. Markets tend to price in a “risk premium” when tensions escalate in major oil-producing regions, and traders wasted little time reacting.
According to Phil Flynn of Price Futures Group, early gains were driven by concerns over the U.S. military buildup, even as optimism around possible peace talks between Russia and Ukraine tempered some of the upside. Trilateral negotiations involving Russia, Ukraine, and the U.S. are scheduled to resume in Abu Dhabi on February 1, offering a potential counterweight to broader geopolitical risks.
Beyond geopolitics, fundamentals also supported the rally. The U.S. Energy Information Administration reported a surprise drawdown in crude inventories, with stockpiles falling by 2.3 million barrels to 423.8 million barrels for the week ended January 23. Analysts had expected a build of roughly 1.8 million barrels.
UBS analyst Giovanni Staunovo described the report as solid, pointing to strong crude exports and lower imports as key drivers behind the draw. While gasoline and distillate inventories rose modestly, the headline crude number reinforced the perception of a tightening supply environment.
Adding momentum to oil prices is a powerful winter storm that swept across much of the U.S. over the weekend, straining energy infrastructure and power grids, temporarily knocking production offline. While producers began restoring wells on Wednesday, domestic crude output was still estimated to be down by about 600,000 barrels per day - roughly 4% of total U.S. production.
Weather-related disruptions are typically short-lived, but in a market already on edge, even temporary supply losses can move prices.
Another important tailwind for oil prices has been the U.S. dollar. The greenback is hovering near four-year lows against a basket of major currencies, making dollar-denominated commodities like oil cheaper for buyers using other currencies.
This comes as the Federal Reserve held interest rates steady on Wednesday, acknowledging that inflation remains elevated while economic growth stays solid. Notably, the Fed offered little guidance on when rate cuts might resume, leaving the dollar under pressure and commodities supported.
Outside the U.S., production losses in Kazakhstan are also underpinning prices. Although the OPEC+ member has expressed hope that output at the massive Tengiz field could gradually resume within a week, sources suggest the restart could take longer than expected. Any extended outage from the field would further tighten global supply at a time when markets are already sensitive to disruptions.
Oil’s latest rally highlights how quickly sentiment can shift when geopolitics, weather, and macroeconomic factors align. While hopes for diplomatic progress in Ukraine could cap gains, tensions involving Iran, unexpected supply disruptions, and currency dynamics are keeping prices elevated.
For now, the market appears firmly focused on risks rather than relief - and until clearer signals emerge on diplomacy or supply recovery, volatility is likely here to stay.
Fuel card prices will remain fairly flat as we head into February.
