Oil Prices Capped by Supply Glut Amid Iran Threats

Oil prices have surged 15% in January, fueled by a series of supply disruptions and rising fears of a U.S. strike on Iran. Despite this, crude remains stuck in a familiar trading range. Tough rhetoric from Washington and Tehran is adding a risk premium, but with the global market still well-supplied, it will take a major, sustained supply shock to push prices significantly higher.

In January, Brent crude futures climbed above $70 a barrel for the first time since last July, putting the benchmark on course for its largest monthly gain since January 2022. This rally is the result of several supply setbacks coinciding with escalating geopolitical tension in the Middle East.

A String of Global Supply Shocks

January saw a substantial hit to global crude supply from multiple, unrelated incidents, with some outages expected to last for weeks or months.

• Venezuela: Exports dropped to an average of just 605,000 barrels per day (bpd) following the U.S. arrest of Nicolas Maduro. This is well below the 2025 average of 780,000 bpd as the country's oil industry struggles.

• Kazakhstan: A power outage on January 18 halted production at the massive Tengiz field. While operations have resumed, output is not expected to return to its pre-outage level of over 900,000 bpd before mid-February.

• United States: A severe winter storm knocked out up to 2 million bpd of production, representing roughly 15% of the national supply, and the recovery is still underway.

The Market's Strong Counter-Narrative: Oversupply

While these disruptions have supported prices, the gains have been capped. The primary reason is the persistent reality of a global supply glut, driven by rising output from other regions, including key OPEC producers. This surplus has been putting downward pressure on prices for months.

Underscoring this trend, the International Energy Agency (IEA) forecasts a massive oversupply of 3.7 million bpd in 2026. This projection is supported by evidence of growing onshore and offshore inventories, which provide a significant buffer against short-term disruptions.

Iran Tensions Escalate, Spiking Volatility

Adding to the bullish case, recent threats from President Donald Trump to strike Iran, coupled with a large U.S. military buildup in the region, have injected fresh anxiety into the market. The situation remains highly uncertain, with key questions about if, how, and when Washington might act—and how Tehran would retaliate.

The stakes for the oil market are extremely high. Iran, OPEC’s fourth-largest producer, pumped 3.3 million bpd in 2025, accounting for about 3% of global crude. Tehran has vowed to respond to any U.S. strike, potentially by attacking neighboring states. This raises the risk of a wider conflict that could disrupt energy exports from a region that supplies nearly 20% of the world's oil.

Market nervousness is clear. The CBOE crude oil volatility index (.OVX), a measure of expected price swings, shot up from 30 at the start of the year to over 50, its highest level since the Israel-Iran war last June.

Figure 1: The CBOE Crude Oil Volatility Index (.OVX) jumped from 30 to over 50 in January, reflecting heightened market anxiety over potential U.S.-Iran conflict.

Why the Geopolitical Risk Premium Remains Limited

With physical outages and Middle East tensions creating a bullish backdrop, why hasn't Brent crude broken out of the $60 to $80 per barrel band it has occupied for nearly two years?

The answer is that investors are only pricing in a modest geopolitical risk premium. The market's focus remains fixed on the prevailing global supply glut. Prices stayed within this same narrow range last year despite the Israel-Iran war, Ukrainian attacks on Russian oil facilities, and Trump's "Liberation Day" tariff announcement.

Figure 2: Brent crude prices have remained largely within a $60 to $80 per barrel range over the last two years, absorbing various geopolitical shocks without a sustained breakout.

Ultimately, today's oil market is less responsive to political tensions than in the past. For prices to break into triple-digit territory, a doomsday scenario—such as a regional war that severely disrupts oil flows—would likely be required. For now, traders need to see actual supply losses large enough to erode the global overhang, and that remains a very high bar to clear.