By: Economy Middle east

Oil prices dropped on Friday from multi-month highs, though they remain on track for their largest gains in years, as a risk premium rose over the possibility of a U.S. strike on Iran that could disrupt supply.

As of 6:08 GMT, Brent crude futures fell 58 cents to $70.13 a barrel, after climbing 3.4 percent on Thursday to close at their highest level since July 31. Meanwhile, U.S. West Texas Intermediate (WTI) crude fell 78 cents to $64.64 a barrel, following a 3.4 percent gain in the previous session that marked its highest close since September 26.

Prices eased after the overnight rally as fears of a potential U.S. strike on Iran and a closure of the Strait of Hormuz had not materialized.

Brent to mark largest increase since January 2022

Geopolitical tensions have intensified following a U.S. military buildup in the Middle East. On Wednesday, President Donald Trump warned Iran to negotiate a nuclear deal or face military action, prompting Tehran to threaten strong retaliation.

As a result, oil prices are poised for their first monthly gains in six months, with Brent climbing 14.7 percent to mark its largest increase since January 2022, while WTI is on track to rise 12 percent in January, marking its biggest monthly gain since July 2023.

Meanwhile, the U.S. dollar rose on Friday, trimming its weekly losses, boosted by Trump’s announcement that he would soon reveal his nominee for Federal Reserve Chair and by optimism that U.S. lawmakers would avert a government shutdown.

“The risk of an escalation in geopolitical tensions is temporarily outweighing expectations of a supply glut. As a result, hedge funds have increased their net-bullish wagers on oil to the highest levels since August. Even the options market shows a surge in premium and open interest for bullish crude oil call options,” said Vijay Valecha, Chief Investment Officer, Century Financial.

“If the U.S. strikes Iran, it could impact flows through the Middle East, which accounts for a third of global supply, particularly OPEC’s production of 3.3 mbpd. Similarly, if Iran responds, then the disruptions could spread to the Strait of Hormuz,” he added.

Supply disruptions boost oil prices in January

Oil prices were further supported this month by supply disruptions. Disruptions in Kazakhstan, Russia and Venezuela reduced a combined 1.5 million barrels per day (bpd) of output in January, according to JPMorgan analysts. In addition, a U.S. Arctic wave is expected to further cut crude and condensate production by 340,000 bpd this month.

The unexpected drawdown in stockpiles in the world’s largest oil-consuming nation further supported oil prices. U.S. crude stockpiles dropped by 2.3 million barrels to 423.8 million barrels in the week ended January 23, the Energy Information Administration said on Wednesday, defying analysts’ expectations for a 1.8 million-barrel increase.

Kazakhstan announced it is restarting the Tengiz oilfield in stages, targeting full production within a week after three unexplained electrical fires earlier this month affected 7.2 million barrels of output. Russian oil exports have been impacted by bad weather, while Venezuela was forced to cut production following the early-month ousting of President Nicolas Maduro.

Venezuela’s interim government on Thursday approved a comprehensive reform of its main oil law. On the same day, the Trump administration broadly eased sanctions on the country’s oil industry, moves that could boost Venezuela’s oil and gas production and encourage investment.