Oil prices experienced a notable retreat of more than 1% on Friday, stepping back from the multi-month peaks they had recently achieved. Despite this pullback, the market remains firmly on course to record its most substantial gains in years, fueled by a sharp escalation in risk premiums. The underlying driver of this volatility is the growing fear that a potential U.S. military strike on Iran could severely disrupt global oil supplies, sending shockwaves through the energy sector.
Price Movements and Market Dynamics
Brent crude futures, a key global benchmark, declined by 91 cents to settle at $69.80 per barrel. This drop followed a significant 3.4% surge on Thursday, which had propelled prices to their highest level since July 31. Notably, the March contract for Brent is set to expire later on Friday, adding an element of market uncertainty. Meanwhile, the more actively traded April contract saw a steeper decline, slipping $1.07 to $68.52.
In parallel, U.S. West Texas Intermediate crude also faced downward pressure, falling $1.06 to $64.36 a barrel. This retreat came after a robust 3.4% gain in the previous session, which had pushed WTI to its highest settlement since September 26. The simultaneous softening of both benchmarks highlights a cautious market sentiment as traders reassess the immediate geopolitical risks.
Geopolitical Tensions and Supply Concerns
According to market analysts, the recent price softening can be attributed to a cooling-off period following the previous night's rally. Initial fears of a potential U.S. strike on Iran and the consequent disruption to critical traffic through the Strait of Hormuz have, so far, not materialized into immediate action. However, the geopolitical landscape remains highly charged and unpredictable.
Geopolitical tensions have intensified significantly amid a noticeable buildup of U.S. military forces in the Middle East. On Wednesday, U.S. President Donald Trump issued a stark warning to Iran, urging the nation to reach a nuclear agreement or face the possibility of military action. In response, Tehran has warned of a strong and decisive retaliation, further escalating the standoff.
Broader Market Influences
The U.S. dollar advanced on Friday, trimming its weekly decline, as market participants reacted to President Trump's announcement that he would soon name his choice for Federal Reserve chair. Additionally, hopes that U.S. lawmakers would avert a government shutdown provided further support to the currency, indirectly influencing oil prices.
Despite the day's retreat, both Brent and WTI crude benchmarks are poised to achieve their first monthly gains in six months. Brent is up an impressive 14.7% for January, marking its sharpest monthly rise since January 2022. Similarly, WTI has surged approximately 12% during the same period, representing its biggest monthly increase since July 2023.
Diplomatic and Strategic Discussions
In a related development, the Trump administration is currently engaged in separate discussions in Washington this week. Senior defence and intelligence officials from Israel and Saudi Arabia are participating in talks focused on Iran, according to informed sources. U.S. officials have clarified that while President Trump is carefully weighing his options, no definitive decision has been made regarding the launch of a military strike.
Analyst Insights and Trading Outlook
Brokerage firm Choice Institutional Equities has provided a cautious perspective on the sustainability of current oil price levels. The firm suggests that prices are less likely to be maintained at these elevated levels unless the embedded premium unwinds, which could potentially trigger a sharp price correction.
The firm further elaborated, "Despite elevated oil prices, we expect OPEC+ to maintain its pause on output hikes at its upcoming meeting on February 1, 2026. Overall, we continue to expect Brent to average at USD 61.5 per barrel in 2026, against a backdrop of increased competition. This competition stems from (a) relentless supply of oil from the U.S., (b) gradual unwinding of cuts by OPEC+, and (c) the possible removal of sanctions."
Technical Analysis and Support Levels
Rahul Kalantri, Vice President of Commodities at Mehta Equities, offered insights into the technical outlook for crude oil. He stated, "We expect crude oil prices to remain volatile in today's session. Crude oil is finding support at $62.55-$61.00, with resistance levels positioned at $64.40-$65.10. In Indian Rupee terms, crude oil has support at Rs 5,720-5,640, while resistance is observed at Rs 5,880-5,965."
This analysis underscores the heightened volatility and the critical price levels that traders are monitoring closely in the current market environment.
