## Crude Oil Reaches Monthly Highs: Iran Conflict Pushes Oil Prices Higher

Geopolitical tensions have become a key driver of energy prices. February WTI crude oil contracts surged by 3.10%, while RBOB gasoline increased by 2.00%, both reaching monthly highs. Amid escalating protests in Iran and sharp statements from the US administration regarding demonstrator safety, investors are concerned about potential disruptions in oil supply. Considering Iran produces over 3 million barrels per day, even minor escalation poses a serious risk to the global market.

Alongside geopolitical tensions, strong US economic indicators are providing additional momentum to prices. Unemployment in December fell to 4.4%, pleasantly surprising analysts, and the University of Michigan's consumer sentiment index for January rose to 54.0. These data points indicate sustained demand for energy in the world's largest economy. The US dollar index reached a four-week high, but this did not stop the rise in oil prices.

### Market mechanisms amplify price fluctuations

In addition to supply deficit expectations, the strengthening crack spread to a three-week high encourages refineries to buy more crude oil and increase gasoline and distillate output. The annual rebalancing of major commodity indices will also have an impact: Citigroup expects that reweighting in the BCOM and S&P GSCI indices will attract approximately $2.2 billion in investments in oil futures over the next week.

Contrary to bullish factors, Saudi Arabia has been lowering the price of its Arab Light crude for February shipments for the third consecutive month, reflecting concerns over weakening demand. Morgan Stanley has revised its forecasts and now expects a larger global oil surplus with a peak in mid-year. The bank's analysts lowered price outlooks: in the first quarter, they expect oil prices at $57.50 ( instead of $60), and in the second — $55 per barrel (also with a decrease from $60).

### Structural shifts in supply and demand

Vortexa data show a 3.4% weekly decline in oil volumes on stationary tankers to 119.35 million barrels. US crude oil inventories as of January 2 were 4.1% below the five-year seasonal average, while distillates fell by 3.1%. US crude oil production during the same period only slightly retreated from the November record, remaining at 13.811 million barrels per day. EIA raised its US production forecast for 2025 to 13.59 million barrels per day, and drilling activity increased by three new rigs to 412 installations.

In China, demand remains intense: oil imports in December increased by 10% compared to November and reached a record 12.2 million barrels per day, as the country replenishes strategic reserves. OPEC+ is holding off on expanding production until the first quarter of 2026, only restoring a small part of the 2.2 million barrels per day cut made at the start of 2024. OPEC production in December increased by 40,000 barrels per day to 29.03 million barrels per day.

### Impact of sanctions and escalation on global supplies

Ukrainian drone and missile attacks have affected at least 28 Russian oil refineries over the past four months, and new US and European sanctions on Russian tankers and oil infrastructure have further limited Russia’s export capabilities. IEA forecasts that global oil surplus will reach a record 3.815 million barrels per day in 2026, compared to over 2 million in 2025. Meanwhile, OPEC revised its third-quarter forecast, changing expectations from a 400,000-barrel-per-day deficit to a 500,000-barrel-per-day surplus, signaling a transition to a new phase in the market.