Geopolitical Risk Premium in Oil May Lead to Breakout

The petroleum market continues to catch a bid as the risk of escalation between the U.S. and Iran remains in the headlines, and for good reason. Concerns surrounding oil logistics, particularly the potential for a blockade of the Strait of Hormuz, which accounts for roughly 20% of global “oil-on-water” flows (especially to the Asia-Pacific region), have raised alarms across physical markets. Rising insurance risk premiums for tankers operating in the region have also contributed to higher prices. However, geopolitical tension is only one of several factors driving oil higher in recent weeks.

EIA data suggest U.S. oil inventory levels have come in below expectations to start the year, as the market continues drawing down crude stockpiles while leveraging elevated refinery utilization rates to boost gasoline and diesel output. Winter weather has added further pressure, with the January polar vortex increasing demand for heating oil and even prompting the rare use of oil-fired power generation in parts of New England. These factors have accelerated both crude and distillate inventory draws.

Despite these supportive elements, the oil market still faces notable headwinds that may temper bullish enthusiasm. OPEC+ continues to evaluate potential production quota increases. While this does not necessarily imply immediate output growth, it highlights the group’s flexibility to respond to supply disruptions or shifts in global demand.

In the near term, seasonal demand softness tied to the Chinese Lunar New Year, already underway, could weigh on prices, as industrial activity and factory production typically slow during the holiday period. At the same time, recent shifts in U.S. tariff policy may provide a counterbalance. The Supreme Court’s move to curb President Trump’s use of IEEPA tariffs has reduced trade pressures on China and could support increased port activity in the weeks and months ahead, potentially boosting oil demand.

Although geopolitical risk premiums can fade quickly if tensions ease, several underlying fundamentals remain constructive for oil over the medium term. From a technical standpoint, the $67 level in WTI stands out as a key breakout threshold that could attract momentum buyers and signal a potential upside move.

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