Energy Markets React to Shifting Iran Tensions and Inventory Data; Oil Prices Sink on Multiple Headwinds

Crude oil futures experienced a substantial pullback on Thursday, with February WTI crude closing at -2.83 points (-4.56%), while February RBOB gasoline fell -0.0466 points (-2.55%). The sharp decline reflected a confluence of bearish factors, including easing geopolitical tensions surrounding Iran, a strengthening US dollar index that climbed to a 6-week peak, and pressures emanating from this week’s EIA crude inventory report, which flagged rising stockpiles across both crude oil and gasoline markets.

Geopolitical De-Escalation Undermines Energy Support

The primary catalyst for Thursday’s selloff centered on reduced military escalation risks in the Middle East. After President Trump indicated a potential pause in US military action against Iran, following assurances from Tehran that protester executions would cease, market participants reassessed the likelihood of supply disruptions originating from OPEC’s fourth-largest producer. This shift in geopolitical calculus eroded the premium that had supported crude prices amid broader unrest across Iranian cities.

Iran’s role as a crude producer exceeding 3 million barrels per day makes it strategically significant for global energy markets. Escalating civil unrest in the country had previously triggered concerns about potential production losses. However, with Trump’s signals of restraint, traders moved to liquidate long positions that had been built on geopolitical risk hedges. Earlier reports indicating that certain US personnel had received guidance to evacuate from Qatar’s Al Udeid Air base had amplified these concerns, yet Thursday’s diplomatic thaw reversed that dynamic.

Dollar Strength and Inventory Pressures Accelerate the Decline

The dollar index’s surge to its highest level in six weeks exerted additional downward pressure on energy commodities. A stronger US currency typically reduces demand for dollar-denominated assets like crude oil, as international buyers face higher purchasing costs. Simultaneously, Wednesday’s EIA crude inventory report revealed developments that weighed on market sentiment. The report documented elevated crude and gasoline supplies, with specific inventory metrics showing US crude holdings 3.4% below their 5-year seasonal average, while gasoline stocks climbed 3.4% above the seasonal norm. Distillate inventories trended 4.1% below historical averages.

US crude production in the week ending January 9 dipped 0.4% week-over-week to 13.753 million barrels per day, staying just shy of the record 13.862 million bpd achieved in November. The modest production decline coincided with a reduction in active US oil rigs, which fell by three units to 409 as of January 9—a level only slightly above the 4.25-year low of 406 rigs recorded in December.

Mixed Signals from Supply-Side Dynamics

Supply disruptions in other regions offered some counterbalance to downward pressures. Drone strikes targeting oil tankers near the Caspian Pipeline Consortium terminal on Russia’s Black Sea Coast have curtailed crude loadings at the facility by approximately 50%, reducing shipments to around 900,000 barrels per day. Additionally, Ukrainian drone and missile operations have struck at least 28 Russian refineries over the past four months, constraining Moscow’s crude export capacity. At least six Russian tankers in the Baltic Sea have sustained damage from Ukrainian attacks since November’s conclusion.

Storage dynamics also painted a nuanced picture. Vortexa data from Monday indicated that stationary crude tanker inventories—those moored for at least seven days—declined 0.3% week-over-week to 120.9 million barrels during the January 9 week, suggesting modest absorption of supplies into commercial channels.

Demand Strength in Asia Provides Limited Support

Chinese crude demand offered modest price support as Beijing rebuilds its strategic reserves. Kpler statistics project that December Chinese crude imports will expand 10% month-over-month to reach a record 12.2 million barrels per day. This demand absorption has helped mitigate some of the downward momentum that otherwise would have pressured prices further.

OPEC+ Production Pause Fails to Rally Market

OPEC+ reaffirmed on January 3 its commitment to pause production increases during the first quarter of 2026, a decision designed to manage an anticipated global oil surplus. The cartel had previously announced a 137,000 barrel-per-day increase in December, with subsequent restraint planned for early 2026. OPEC’s December crude output rose modestly by 40,000 bpd to 29.03 million bpd. However, these production management measures proved insufficient to support prices on Thursday, overshadowed by the combination of easing Iran tensions and the inventory report’s mixed signals.

OPEC+ continues efforts to restore the 2.2 million barrels per day of production cuts implemented in early 2024, with approximately 1.2 million bpd remaining to be recovered. The International Energy Agency forecasted a record global oil surplus of 4.0 million bpd for 2026, with projections refined to 3.815 million bpd in its latest assessment, reflecting expectations of sustained oversupply conditions that constrain price appreciation potential.

Demand Forecasts and Production Outlook Temper Bullish Sentiment

On Tuesday, the EIA adjusted its 2026 US crude production estimate upward to 13.59 million bpd from the previous month’s projection of 13.53 million bpd, while simultaneously reducing its 2026 US energy consumption forecast to 95.37 quadrillion BTU from 95.68 quadrillion BTU. These adjustments underscore the structural challenges confronting energy markets, with rising production capacity colliding against moderating demand growth expectations. The inventory report dynamics, combined with revised forecasting parameters, reinforce the headwinds currently restricting crude’s upside momentum.