Why Oil Markets Are Climbing: A Perfect Storm of Supply Pressures and Geopolitical Tensions

Multiple Factors Propel Crude Prices Higher

February WTI crude oil surged +1.00 points (+1.74%) to close higher on Monday, while February RBOB gasoline climbed +0.0218 (+1.28%). After recovering from early-session losses, both markets rallied sharply as a convergence of bullish catalysts overwhelmed bearish pressures. The question of why crude is rising becomes clearer when examining the constellation of supply disruptions and policy decisions currently supporting the energy complex.

Geopolitical Threats Tighten Global Oil Supply

Rising tensions across multiple regions are creating significant headwinds for crude production. Ukrainian forces have targeted at least 28 Russian refineries over the past four months, directly constraining Russia’s refining capacity and export capabilities. More aggressively, since late November, Ukraine has ramped up maritime attacks, striking at least six tankers in the Baltic Sea with drones and missiles.

These disruptions compound the impact of fresh US and EU sanctions targeting Russian oil infrastructure, trading vessels, and energy companies. Russia remains a critical supplier to global markets, so any constraint on its export flows reverberates across crude prices. Additionally, ongoing tensions in the Middle East, instability in Nigeria, and political uncertainty in Venezuela all contribute to perceived supply risk premiums embedded in crude valuations.

OPEC+ Pumps the Brakes, Supporting Market Balance

On Sunday, OPEC+ reaffirmed its commitment to pause production increases throughout Q1 2026, providing direct support to the crude market. The organization had previously announced a +137,000 bpd increase for December 2025, but signaled that output would hold steady during the first quarter. This measured approach reflects OPEC+ recognition that global oil supply remains ample relative to demand.

The pause decision carries strategic importance: OPEC+ is methodically restoring the 2.2 million bpd production cut implemented in early 2024. Currently, 1.2 million bpd of cuts remain to be unwound, giving the cartel room to manage market dynamics through measured output adjustments. This deliberate pacing lends stability to crude pricing.

Chinese Demand Rebounds, Anchoring Price Support

China’s crude import appetite is rebounding strongly, providing crucial demand-side support. According to Kpler data, China imported crude at record levels in December, with imports set to climb 10% month-over-month to 12.2 million barrels per day as the country rebuilds its strategic inventories. This inventory restocking cycle historically provides sustained demand for crude, preventing sharp price declines.

Evidence of this Chinese demand strength appeared in Vortexa data showing that crude stored aboard stationary tankers (held for 7+ days) fell 3.4% week-over-week to 119.35 million barrels in the week ending January 2. The decline in floating storage suggests crude is moving into consumption rather than piling up in temporary holding—a positive signal for oil prices.

Market Mechanics and Financial Tailwinds

The dollar index retreated from its 3-week high on Monday and turned lower, reducing headwinds for crude priced in dollars. A weaker greenback typically elevates energy prices for international buyers. Simultaneously, US equity markets surged sharply, lifting sentiment around economic growth prospects and energy demand. This improvement in risk appetite further supported crude alongside equities.

However, one mechanical warning sign emerged: the crude crack spread—a key refinery margin indicator—tumbled to an 11-month low. This compression in the spread between crude and refined product prices discourages refiners from actively purchasing crude and processing it into gasoline and diesel. When crack spreads collapse, it can dampen crude demand from refiners despite supportive macro conditions.

Supply-Demand Imbalance Looms Larger

The International Energy Agency’s mid-October forecast projected a record global oil surplus of 4.0 million barrels per day for 2026. Last month, OPEC revised its Q3 2025 outlook from a deficit scenario to a modest +500,000 bpd surplus, correcting prior estimates that had predicted a -400,000 bpd deficit. This shift reflects stronger-than-expected US production and accelerating OPEC output.

The EIA raised its 2025 US crude production estimate to 13.59 million bpd from 13.53 million bpd previously. US crude output in the week ending December 26 remained flat at 13.827 million bpd, sitting just below the record 13.862 million bpd achieved in early November. Meanwhile, Baker Hughes reported that active US oil rigs rose by 3 to 412 in the week ended January 2, recovering from the 4.25-year low of 406 rigs reached on December 19.

Inventory Dynamics Paint Mixed Picture

EIA data released last Wednesday revealed uneven inventory conditions across the energy complex. US crude oil inventories as of December 26 sat 3.0% below the seasonal 5-year average, suggesting relatively tight crude balances. Gasoline inventories, by contrast, checked in 1.9% above the seasonal average, indicating adequate refined product availability. Distillate inventories registered 3.7% below the 5-year seasonal average, pointing to potential tightness in heating fuels and diesel markets.

The Convergence Explains Rising Oil Prices

Why is oil price rising? The answer lies in this layering of factors: geopolitical supply disruptions in Russia and beyond, OPEC+ production discipline, resurging Chinese demand, technical refinery margin weakness, and inventory imbalances across different petroleum products. No single factor dominates; rather, the confluence of tighter crude supply relative to demand, combined with financial tailwinds from currency weakness and equity strength, propels crude toward higher levels. Until either of these tailwinds reverses or global supply surplus expectations crystallize into actual production additions, crude prices retain upside bias.