Geopolitical Premium Fades and Inventory Pressures Weigh on Oil Prices, Ending Five-Day Rally

January 16th News

On January 15, international crude oil futures ended their five-day winning streak and plunged sharply, mainly because the risk premium that had accumulated earlier due to the situation in Iran rapidly dissipated. The settlement price for WTI crude oil March contract was reported at $59.08 per barrel, down $2.80 from the previous day—a price decline of 4.5%. For Brent crude oil, the March contract settlement price was $63.76 per barrel, down $2.76 from the previous day, representing a price decline of 4.1%.

Notably, Brent crude oil prices during the session touched $66.82 per barrel, reaching a temporary high since September. However, subsequently hit by multiple negative factors, prices quickly fell back, with intraday volatility significantly increasing.

Geopolitical tensions easing, risk premium quickly dissipating

Geographical factors are the core drivers of this oil price fluctuation, with market concerns over disruptions to Iran's supply easing from a previous state of heightened worry, leading to the concentrated withdrawal of accumulated risk-averse buying.

The U.S. stance is sending signals of easing tensions: On January 15, local time, White House Press Secretary Levitt stated that Trump and his team are closely monitoring the situation in Iran while keeping all options open. Phil Flynn, senior analyst at Price Futures Group, pointed out that market expectations have shifted from “a very high likelihood of striking Iran” to “a lower probability,” and this shift in expectations directly became the primary downward pressure on oil prices that day.

Sanctions as an Alternative to Armed Action: On the same day, the U.S. Treasury Department announced sanctions against 18 individuals and entities in Iran involved in the export of oil and petrochemical products, as well as foreign companies affiliated with Iran. Iranian official Larijani was also added to the sanctions list. The market interpreted this move as a signal that the U.S. is using economic sanctions as an alternative to armed strikes, thereby reducing the risk of an escalation in geopolitical conflicts.

The situation in Venezuela takes another negative turn: Although the U.S. has seized an oil tanker linked to Venezuela, the phone call between Trump and Venezuelan interim President Rodríguez sent out positive signals. Market expectations are that short-term stability will prompt Venezuela to increase its oil exports over the coming weeks, further putting downward pressure on oil prices.

Inventory Data Falls Short of Expectations, Highlighting Fundamental Pressures

Inventory data released by the U.S. Energy Information Administration (EIA) further intensified downward pressure on oil prices, confirming the current weak demand for crude oil. The data showed that U.S. crude oil inventories unexpectedly rose last week, and gasoline inventories increased far more than market expectations, reflecting a sluggish recovery in refined-product consumption and rekindling concerns about a supply-demand imbalance.

Outlook: The Tug of War Between Supply and Demand and Geopolitics

Crude oil analysts believe that short-term oil prices will remain in a tug-of-war between bullish and bearish forces, with volatility likely to widen further. In the medium to long term, underlying concerns on the demand side will continue to dominate the overall trend.

Positive Factor: Structural positives on the supply side

Risk of Shrinking Iranian Supply: The U.S. continues to intensify sanctions against Iran, and coupled with the impact of these sanctions on the supply chain related to Iranian oil exports, Iran's crude oil supply could decline further in the future, providing support from the supply side.

Venezuela's export recovery is slow: Although the market anticipates an increase in its exports, the country's oil industry suffers from weak infrastructure, resulting in a sluggish recovery process that makes it unlikely to significantly impact the global supply landscape in the short term.

Negative factors: The demand side is under significant pressure in the medium to long term.

A weak U.S. economy is weighing on demand: Poor U.S. economic data are directly impacting the consumption demand for crude oil and refined petroleum products, thereby limiting the room for oil prices to rebound.

The accelerated adoption of new energy sources is steadily eroding market share: In some Asian countries and regions, the pace of promoting new energy is picking up, continuously reducing the share of traditional energy in the energy consumption mix, and putting medium- to long-term structural downward pressure on crude oil demand.

Overall, in the short term, oil prices will maintain a volatile trend amid the tug-of-war between supply and demand and fluctuations in geopolitical situations: any recurrence of geopolitical events (such as an escalation of conflicts in the Middle East or a sudden change in the situation in Iran) could trigger a short-term spike in oil prices; however, weak demand, high inventories, and the long-term trend of new energy substitution will continue to put downward pressure on oil prices, making it difficult for them to sustain a trend of rising prices. The overall volatility may further increase.