Oil prices advanced for a third straight session on Thursday as markets priced in a larger geopolitical premium tied to threats of U.S. military action against Iran and the arrival of a U.S. naval group in the Middle East.
By 0216 GMT, Brent crude futures were trading 50 cents higher, up 0.73% at $68.90 a barrel, while U.S. West Texas Intermediate (WTI) crude rose 58 cents, or 0.92%, to $63.79 a barrel. Both benchmarks have gained roughly 5% since Jan. 26 and are at levels not seen since Sept. 29.
Prices climbed amid an escalation in rhetoric from U.S. leadership calling for Iran to end its nuclear programme, coupled with the movement of a U.S. naval group into the region. Iran, the fourth-largest producer within the Organization of the Petroleum Exporting Countries, currently produces about 3.2 million barrels per day.
U.S. sources familiar with the discussions have said the U.S. President is weighing options that could include strikes on Iranian security forces and leaders intended to motivate protests and possibly unseat the current regime. The possibility of direct military action has pushed a geopolitical component into oil valuations.
"The potential for Iran getting hit has escalated the geopolitical premium of oil prices by potentially $3 to $4 (per barrel)," analysts at Citi said in a note on Wednesday. They added that further geopolitical escalation could push prices to as high as $72 a barrel for Brent.
Adding to the bullish backdrop, U.S. crude inventories unexpectedly fell last week. The Energy Information Administration reported inventories declined by 2.3 million barrels to 423.8 million barrels in the week ended Jan. 23. That contrasted with a Reuters poll of analysts that had expected a 1.8 million-barrel build.
"This development suggests that the short-term supply–demand balance has tightened, reflecting steady refinery demand and constrained barrels available to the market," said Linh Tran, a market analyst at XS.com.
Citi noted additional factors that could sustain higher prices, including heightened geopolitical risks, U.S. restrictions on purchases of Russian oil, and ongoing buying from China. These drivers, the bank said, may keep oil elevated despite earlier market expectations for a substantial oversupply this year.
The convergence of a heightened geopolitical risk premium and a surprise draw in U.S. stockpiles has altered near-term market dynamics. Traders and market observers are watching closely for further developments in the region and additional inventory reports that could confirm whether the supply tightness is persistent.
Summary
Oil futures climbed for a third day, with Brent at $68.90 and WTI at $63.79, reflecting fears of a U.S. military strike on Iran and an unexpected 2.3 million-barrel drop in U.S. crude inventories for the week ended Jan. 23. Citi analysts estimate the geopolitical premium added $3-4 per barrel and said Brent could reach $72 if tensions escalate further.