Crude Rallies on Rising Geopolitical Risks

February WTI crude oil (CLG26) on Monday closed up +1.00 (+1.74%), and February RBOB gasoline (RBG26) closed up +0.0218 (+1.28%).

Crude oil and gasoline prices recovered from early losses on Monday and settled sharply higher as rising global geopolitical risks in Russia, the Middle East, Nigeria, and Venezuela are supporting crude prices.   Crude also has support after OPEC+ on Sunday stuck with its plans to pause an increase in the group’s oil production in Q1.  Crude prices added to their gains on Monday after the dollar index fell from a 3-week high and turned lower.  Also, Monday’s sharp rally in stocks boosts confidence in the economic outlook that is supportive of energy demand and crude prices.  

Vortexa reported Monday that crude oil stored on tankers that have been stationary for at least 7 days fell -3.4% w/w to 119.35 million bbl in the week ended January 2.

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 Monday after OPEC+ on Sunday 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 November crude production fell by -10,000 bpd to 29.09 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.

Weakness in the crude crack spread is negative for oil prices.  The crack spread tumbled to an 11-month low on Monday, discouraging refiners from purchasing crude oil and refining it into gasoline and distillates.

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.

Last month, OPEC revised its Q3 global oil market estimates from a deficit to a surplus, as US production exceeded expectations and OPEC also ramped up crude output.  OPEC said it now sees a 500,000 bpd surplus in global oil markets in Q3, versus the previous month’s estimate for a -400,000 bpd deficit.  Also, the EIA raised its 2025 US crude production estimate to 13.59 million bpd from 13.53 million bpd last month.

Last Wednesday’s EIA report showed that (1) US crude oil inventories as of December 26 were -3.0% below the seasonal 5-year average, (2) gasoline inventories were +1.9% above the seasonal 5-year average, and (3) distillate inventories were -3.7% below the 5-year seasonal average.  US crude oil production in the week ending December 26 was unchanged at 13.827 million bpd, just below the record high of 13.862 million bpd from the week of November 7.

Baker Hughes reported last Tuesday that the number of active US oil rigs in the week ended January 2 rose by +3 rigs to 412 rigs, recovering from 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.

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