Oil Market Retreats Amid Dollar Strength and Easing Middle East Tensions

Crude oil and gasoline futures weakened significantly in early February 2026, pressured by a stronger US dollar and reduced geopolitical tensions in the Middle East. March WTI crude oil contracts declined by 5.01%, while March RBOB gasoline fell 4.57%, as risk-off sentiment diminished and diplomatic channels reopened between major global players.

Multiple Headwinds Driving Crude Oil Prices Lower

The recent decline reflects convergence of several bearish factors for petroleum markets. The dollar index reached a 1-week high, making crude oil more expensive for foreign buyers and reducing demand at the margin. Simultaneously, diplomatic developments shifted market sentiment: President Trump indicated ongoing US-Iran negotiations, while Iran’s foreign ministry expressed hope that diplomatic efforts would prevent military escalation. Reports indicated that US envoy Witkoff and Iranian Foreign Minister Abbas Araghchi were scheduled to meet in Istanbul, signaling potential de-escalation that removed some risk premium from crude prices.

The combination of currency strength and geopolitical thaw created a double headwind for petroleum valuations, reversing some of the gains accumulated during periods of elevated Middle East tensions.

Supply Dynamics Shift with Global Export Increases

Supply-side developments added additional pressure on crude oil markets. Venezuelan crude exports surged to 800,000 barrels per day in January 2026, up from 498,000 bpd in December, significantly boosting available global supplies. This expansion in Venezuelan production capacity from an unexpected source created downward pressure on international benchmark prices.

Meanwhile, OPEC’s December crude production rose by 40,000 bpd to reach 29.03 million bpd, as cartel members began modest output increases in preparation for Q1 2026 actions. However, OPEC+ announced it would pause production increases in the first quarter, maintaining current output levels rather than accelerating ramp-ups. This measured approach reflects emerging concerns about global supply surpluses, as the International Energy Agency revised down its 2026 global crude surplus estimate to 3.7 million bpd from prior estimates of 3.815 million bpd.

Geopolitical Risks Provide Partial Offset to Market Weakness

Despite the near-term downward pressures, geopolitical developments in Eastern Europe continue to support crude oil valuations. Russia-Ukraine peace negotiations remain stalled, with the Kremlin maintaining rigid positions on territorial demands, suggesting the conflict will persist and maintain restrictions on Russian crude supplies. Ukrainian drone and missile attacks have targeted at least 28 Russian refineries over the past five months, while also striking six tankers in the Baltic Sea, further constraining Russian export capacity.

New US and EU sanctions targeting Russian oil infrastructure and tankers compound these supply disruptions. The ongoing conflict dynamics maintain a structural floor under crude prices, as extended supply limitations from Russia offset some bearish pressure from other sources.

US Production and Inventory Data Paint Picture of Market Rebalancing

The Energy Information Administration reported that US crude oil inventories as of late January stood at levels 2.9% below the five-year seasonal average, signaling tighter domestic balances. However, gasoline inventories ran 4.1% above the seasonal norm, and distillate inventories were up 1.0% versus historical averages, suggesting uneven inventory positioning across petroleum products.

US crude oil production slipped slightly to 13.696 million bpd in the week ending January 23, modestly below the record of 13.862 million bpd established in November. The number of active US oil rigs remained essentially flat at 411 units, just above recent lows, indicating limited immediate acceleration in production capacity additions. Over the previous 2.5 years, rig counts have collapsed sharply from a 5.5-year high of 627 rigs in December 2022, constraining the foundation for future crude output growth.

Forward Outlook for Crude Oil Markets

The market dynamic for crude oil reflects competing forces: near-term weakness from dollar strength and reduced Middle East risk premiums, offset partially by persistent supply constraints from ongoing geopolitical disruptions and emerging Venezuelan export growth. OPEC+ maintains its measured production strategy, with the cartel and partners meeting to affirm output policies, suggesting price support from supply discipline despite global surplus estimates.

The confluence of these factors—tighter Russian supplies, elevated geopolitical risks in certain regions, and measured OPEC+ production management—should continue to provide underpinning for crude oil prices, even as near-term trading reflects the temporary effects of currency strength and reduced headline tensions.