Crude Oil Under Pressure: How Dollar Strength and Easing Iran Tensions Reshape Energy Markets

Energy markets faced significant headwinds in recent trading sessions as the dollar’s strength combined with moderating geopolitical risks to trigger a sharp correction in crude oil and refined product prices. The interplay of these forces reveals a complex market backdrop where multiple dynamics converge to shape near-term direction for petroleum prices.

Dollar’s Rally Intensifies Downward Pressure on Crude

The dollar index surged to a one-week peak in recent days, creating immediate headwinds for dollar-denominated commodities like crude oil. When the dollar strengthens relative to other currencies, oil becomes more expensive for foreign buyers, typically dampening demand and weighing on prices. March WTI crude oil futures fell sharply by 4.71%, while March RBOB gasoline declined 4.68%, reflecting the broad-based selloff across energy markets triggered partly by this currency strength. The dollar’s strength represents a fundamental headwind that often operates independently of supply-demand fundamentals, illustrating how global currency dynamics can overshadow energy-specific factors in driving price movements.

Geopolitical Tensions Ease, Removing Supply Risk Premium

The landscape shifted regarding Middle Eastern tensions when diplomatic signals suggested a potential de-escalation in Iran relations. President Trump announced that the US is engaged in talks with Iran, while Iran’s foreign ministry expressed optimism that diplomatic channels could avert military confrontation. Reports indicated that US envoy Witkoff and Iranian Foreign Minister Abbas Araghchi are scheduled to meet in Istanbul, signaling substantive engagement rather than military escalation.

This easing of tensions removed a significant risk premium that had previously supported crude prices. Earlier in the month, crude oil had rallied to a 5.75-month peak following more aggressive rhetoric about potential military action, with concerns centered on how an attack against Iran—OPEC’s fourth-largest producer—could disrupt its crude exports and potentially constrain flows through the Strait of Hormuz, through which roughly one-fifth of global seaborne oil passes. With diplomatic efforts now in focus, that supply-disruption premium dissipated quickly.

Venezuela’s Surging Exports Add to Global Supply Glut

Beyond currency and geopolitical factors, fundamental supply-demand dynamics shifted with increased crude exports from Venezuela. Recent data showed that Venezuelan crude exports reached 800,000 barrels per day in January, up significantly from 498,000 bpd in December—a 60% month-over-month increase. This production surge directly expanded global crude supplies and contributed additional downward pressure on prices globally.

The increase reflects Venezuela’s effort to boost hard-currency revenues, and its effects ripple through global markets by easing concerns about regional supply tightness and demonstrating that alternative sources can fill potential supply gaps.

Russia-Ukraine Conflict Provides Counterbalance

However, supply disruptions in other critical regions continue to support underlying crude values. The Russia-Ukraine conflict persists with no near-term resolution in sight, as the Kremlin indicated that the “territorial issue” remains a fundamental sticking point with Ukraine, and there is “no hope of achieving a long-term settlement” unless Russia’s territorial demands are accepted. This outlook means sanctions and supply disruptions related to Russian energy will likely remain in place.

Ukrainian forces have conducted sustained drone and missile campaigns against Russian refineries, with at least 28 facilities targeted over the past five months, materially limiting Russia’s ability to export crude and refined products. Additionally, Ukraine has intensified attacks on Russian tankers in the Baltic Sea, with at least six vessels struck by naval drones and missiles since late November. Combined with new US and EU sanctions on Russian oil companies, infrastructure, and tankers, these factors continue to constrain Russian oil flows and support global prices.

OPEC+ Navigates Complex Supply Landscape

OPEC+ continues calibrating production to balance member revenues against the emerging global surplus. The cartel announced that it will maintain a pause on production increases through the first quarter of 2026, despite having implemented a 137,000 bpd increase in December 2025. OPEC+ is still in the process of unwinding the 2.2 million bpd production cut it implemented in early 2024, with approximately 1.2 million bpd still remaining to be restored. Current OPEC crude production stands at 29.03 million bpd as of December, representing a 40,000 bpd monthly increase.

The International Energy Agency cut its 2026 global crude surplus estimate to 3.7 million bpd from the previous month’s estimate of 3.815 million bpd, suggesting that while surplus production persists, the magnitude may be moderating.

US Production and Inventory Dynamics

On the US front, crude production remains robust but shows signs of moderation. Production in the week ending January 23 stood at 13.696 million bpd, down marginally by 0.3% week-over-week, yet still near the record high of 13.862 million bpd from November. The US Energy Information Administration raised its 2026 crude production estimate to 13.59 million bpd from 13.53 million bpd, while simultaneously cutting its US energy consumption forecast to 95.37 quadrillion BTU from 95.68.

Inventory levels paint a mixed picture. As of January 23, crude oil stocks sat 2.9% below the five-year seasonal average, suggesting some tightness in crude supply. Gasoline inventories, by contrast, were elevated at 4.1% above seasonal norms, while distillate stocks remained 1.0% above the five-year average. This imbalance reflects adequate refined product availability even as crude reserves show relative constraint.

The active rig count provides insight into future production momentum. Baker Hughes reported 411 active oil rigs in the week ended January 30, unchanged week-over-week and modestly above the 4.25-year low of 406 rigs set in late December. Over the past 2.5 years, the rig count has contracted sharply from the 5.5-year peak of 627 rigs in December 2022, signaling that future production growth will likely remain gradual.

Market Outlook: Strength in Complexity

Crude oil markets face competing forces: dollar strength and fading crisis premiums exert downward pressure, while supply disruptions and managed OPEC+ production provide underlying support. Tanker storage data from Vortexa showed that stationary crude reserves declined 6.2% week-over-week to 103 million barrels in the week ended January 30, suggesting that floating storage is not absorbing excess supply at the pace it once did. This dynamic reinforces that current prices reflect a genuine market balance rather than speculative extremes, where both supply strength and demand-side dollar headwinds operate with near-equal influence.