Crude Oil
Geopolitical swings push crude higher into the weekend as escalation risk builds
Crude markets spent the week oscillating between diplomacy and escalation as US-Iran negotiations progressed throughout the week even as military posturing intensified across the region. Early optimism around constructive exchanges gave way to renewed anxiety as traders reassessed the probability of confrontation heading into the weekend. On Friday prices rallied, with the WTI prompt-month contract settling at $67.02/Bbl, up $1.81 on the day, underscoring how quickly the risk sentiment shifted towards escalation.
Front-end volatility remains elevated and call skew continues to favor upside protection, a pattern consistent with prior geopolitical flashpoints. The market is assigning value to tail risk scenarios tied to potential disruption in the Strait of Hormuz, through which roughly one quarter of global seaborne crude flows.
Although Middle East tensions are driving near term pricing, the medium-term balance remains pointed toward surplus. Global inventories are projected to build materially in 2026 and remain elevated into 2027 as supply growth outpaces demand. Further additions are likely as OPEC+ delegates signaled another round of production quota increases for their upcoming meeting, potentially around 137 MBbl/d, consistent with prior increases.
At the same time, institutions have begun adjusting price expectations higher. Goldman Sachs recently lifted its late 2026 WTI forecast from $50 to $56/Bbl, citing smaller than expected inventory builds across developed economies. Sanctioned crude has increasingly built at sea as restrictions complicate discharge, particularly with India tapering purchases of Russian barrels. China has also acted as a key absorber of excess supply. Throughout 2025, Chinese buyers absorbed discounted crude to meet strategic petroleum reserve requirements, diverting barrels that might otherwise have flowed into OECD commercial inventories. If Chinese buying were to slow, incremental supply would likely appear more clearly in OECD balances, translating into renewed downside pressure absent the current geopolitical premium.
At present, US–Iran tensions are setting the tone. If diplomacy prevails, the geopolitical premium would likely fade, exposing a structurally loose forward balance characterized by rising supply and the risk of accelerating inventory builds. If escalation takes hold, the highly sensitive geopolitical backdrop could materially reprice crude higher. Until the situation resolves decisively in one direction or the other, crude will remain driven less by steady fundamentals and more by the evolving probability of conflict.