Near-term geopolitical risk lifts crude despite persistent structural surplus
Crude markets strengthened this week as escalating US–Iran tensions injected a geopolitical risk premium into prices, even as the underlying global balance remains structurally oversupplied. WTI climbed above $66/Bbl at its peak, the highest level since late September, as markets reassessed the risk of disruptions to Middle Eastern supply and shipping routes.
Geopolitics was the dominant driver. Renewed US military posturing and Iranian warnings of retaliation revived concerns over Gulf crude flows and transit through the Strait of Hormuz. Citigroup estimates the Iran-related geopolitical risk premium at roughly $7–10/Bbl for Brent. Options markets reflected this shift, as bullish call positioning outpaced bearish puts for the longest stretch in more than a year, signaling rising demand for upside protection.
Near-term physical factors provided secondary and often offsetting signals. Winter storm disruptions across the US briefly affected production, but refinery outages and industrial slowdowns along the Gulf Coast weighed on near-term crude demand, limiting the upside from weather-driven supply losses. At the same time, attention turned to OPEC+, with the group widely expected to maintain its current supply policy and pause further increases amid seasonally weaker demand.
Despite these near-term tailwinds, the structural picture remains unchanged. The EIA continues to project that global production will outpace demand growth through the medium term, with inventories rebuilding across 2026 and 2027. Persistent surplus barrels, driven by non-OPEC supply growth and incremental OPEC+ volumes, continue to anchor the forward curve, even as backwardation at the front end reflects elevated geopolitical risk and sensitivity to marginal disruptions.
This week’s price action underscores a familiar pattern. Geopolitical risk can lift prompt prices, but it rarely alters the underlying balance without sustained supply losses. In this environment, rallies remain vulnerable. AEGIS maintains a bearish medium-term view on crude, with upside constrained by persistent oversupply and rising inventories.
Crude Oil Factors
Geopolitical Risk Premium. (Bullish, Slightly Priced In) Geopolitical risk has injected a meaningful premium into crude prices, with estimates placing the Iran-related risk premium at roughly $7–10/Bbl. Recent gains have been driven less by structural tightening and more by elevated tail-risk expectations tied to U.S.–Iran tensions.
Speculator Positioning (Bearish, Priced In)Bullish call options have traded at a premium to puts for the longest stretch in roughly 14 months, while hedge funds have lifted net-bullish positions to the highest level since August. This suggests speculative positioning is skewed toward upside tail risk tied to Iran, even as underlying fundamentals remain less supportive.
Oil/Product Inventories. (Bullish, Priced In) The EIA reported a build of +3,391 MBbls in U.S. crude-oil inventories. The build was larger than the average estimate of +600 as reported by Bloomberg. Inventories for the U.S. are now at a deicit of 18.00 MMBbls (-4.2%) to last year, and a deficit of 26.90 MMBbls (-6.1%) to the five-year average.
OPEC+ Quotas. (Bullish, Priced In) OPEC+ has paused planned oil production increases through Q1 2026, keeping output targets unchanged for January–March after raising quotas by about 2.9 m b/d through late 2025. Eight key producers, including Saudi Arabia and Russia, reaffirmed the freeze at their early January meeting, emphasizing market stability amid a looming surplus and seasonal demand patterns.
OPEC Unwind. (Bearish, Mostly Priced in) OPEC+ will convene this weekend to discuss output levels, with the market largely pricing in an extension of the Q1 production pause into March, limiting near-term supply downside risk.
China Demand. (Bearish, Priced In) China’s onshore crude inventories declined to 1.17 billion barrels this week, down from a record 1.20 billion barrels in mid-August, according to data from Kayrros. The draws came from commercial stockpiles, partially reversing the country’s earlier stockpiling surge, a key factor that has supported global oil prices even as the broader market faces record oversupply.
USD (Bearish, Priced In) The dollar has acted as a secondary tailwind for crude, with recent DXY weakness linked to easing rate expectations. Historically, a softer dollar has coincided with stronger commodity prices, reinforcing oil’s recent gains without altering the underlying supply-demand balance.
Ukraine-Russia Resolution. (Bearish, Surprise) Ukrainian President Volodymyr Zelensky said he agreed to work on a peace plan drafted by the US and Russia aimed at ending the war in Ukraine. A peace deal, if followed by the elimination of sanctions on Russian oil over its invasion of Ukraine, could unleash supply from the world's third largest producer.
Trade War. (Bearish, Mostly Priced In) There has been an increase in tit-for-tat trade tension between the US and China, with China sanctioning the US unit of Hanwha Ocean Co., a South Korean shipping major, and warned of additional retaliatory actions against the industry. However, President Trump said high tariffs on China were “not viable,” suggesting potential for de-escalation even as broader tensions remain elevated.
Projected Oversupply. (Bearish, Mostly Surprise) The latest EIA STEO reinforces that these geopolitical episodes are occurring against a backdrop of persistent oversupply. The STEO forecasts global oil inventories will continue to build through 2026, with implied stock builds averaging roughly 2.8 MMBbl/d, as global production growth outpaces demand.
Iran Supply. (Bullish, Slight Surprise) Iran continues to supply roughly 3.2–3.3 mb/d, with exports near multi-year highs around 1.7–2.0 mb/d. With flows still intact, Iran’s impact on crude has been more about potential disruption than realized supply losses.
Russian Supply. (Bullish, Slight Surprise) Russian exports also faced growing logistical friction as US sanctions pushed more barrels into shadow-fleet channels. Strikes on refineries and export facilities have slowed transit and increased reliance on intermediaries, lifting Russian oil-on-water above 180 MMBbl.
Venezuela. (Bearish, Slight Priced In) Venezuela remains a constrained but potentially growing source of supply, producing roughly ~0.8–1.1 mb/d in recent months, far below historical capacity and less than 1% of global output.
Recent policy shifts and easing restrictions could allow incremental increases, with analysts suggesting output could rise by roughly 30% from current levels in the short to medium term, though structural limitations and infrastructure decay cap near-term upside.
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