Global oil prices retreated from recent highs on Friday as signals of potential U.S.-Iran diplomatic engagement eased immediate concerns about military action that could disrupt Middle Eastern crude supplies, though both major benchmarks remained on course for their most substantial monthly gains in years.
Brent crude futures, the international benchmark, fell $1.10 to $69.61 per barrel by 0707 GMT, pulling back from Thursday’s close at its highest level since late July, when the contract had surged 3.4%. The expiring March contract’s decline was mirrored by the more actively traded April future, which slid $1.29 to $68.30.
West Texas Intermediate, the U.S. benchmark, dropped $1.25 to $64.17 per barrel after Thursday’s 3.4% rally pushed it to its loftiest settlement since late September.
The Friday selloff represents a recalibration of risk premiums that had been building throughout the week as Washington deployed additional military assets to the Gulf region. President Donald Trump‘s evolving rhetoric on Iran—shifting from Wednesday’s ultimatum demanding a nuclear deal “or face an attack” to Thursday’s announcement of plans to engage Iranian leadership directly—provided the catalyst for traders to unwind some of the week’s geopolitical risk premium.
Tehran’s defiant response to the initial threats, warning it would “strike back hard” against any American aggression, had contributed to the week’s volatility. However, the absence of actual military strikes or closure of the strategically vital Strait of Hormuz—through which roughly one-fifth of global oil supplies pass from Gulf producers including Saudi Arabia, Iraq, Kuwait, Qatar, the UAE, and Iran—prompted reassessment.
“Prices eased after last night’s rally as the market reassessed geopolitical risks in the Middle East,” explained Anh Pham, senior analyst at LSEG, noting that the feared worst-case scenarios have not materialized.
Currency markets also contributed to the weakness in oil prices on Friday. The U.S. dollar strengthened, reversing earlier weekly losses, after Trump indicated he would soon announce his nominee for Federal Reserve chairman and congressional leaders appeared poised to avert a government shutdown. A stronger greenback typically pressures dollar-denominated commodities by making them more expensive for buyers using other currencies.
Despite Friday’s retreat, the broader trajectory remains decidedly upward. Brent crude is tracking toward a 14.5% gain for January—its largest monthly increase since January 2022—while WTI is on pace for a 12% advance, marking its strongest month since July 2023. Both benchmarks are poised to break five-month losing streaks.
The monthly gains underscore how profoundly Middle Eastern tensions have reshaped oil market dynamics. Behind closed doors in Washington this week, the Trump administration has been hosting separate discussions with senior defense and intelligence officials from Israel and Saudi Arabia focused on Iran strategy, according to two sources familiar with the meetings. While administration officials acknowledge Trump is reviewing military options, no final decision on potential strikes has been made.
Major Wall Street banks are attempting to game out likely scenarios and their market implications. JPMorgan analysts, led by Natasha Kaneva, suggested domestic political considerations may constrain any military response. “Given elevated inflation and this year’s midterm elections, we do not anticipate protracted oil supply disruptions,” the team wrote. “If military action does occur, we expect it to be targeted, avoiding Iran’s oil production and export infrastructure.”
Citi analysts have assigned a 70% probability to what they term “restrained actions” in the near term, potentially including seizures of Iranian oil tankers rather than strikes on production facilities.
While Iran tensions dominate headlines, the oil market is simultaneously grappling with unrelated supply constraints that have tightened global balances. JPMorgan estimates that disruptions across Kazakhstan, Russia, and Venezuela have collectively removed 1.5 million barrels per day from global markets during January.
Kazakhstan announced Wednesday it was implementing a phased restart of the massive Tengiz oilfield following three unexplained electrical fires earlier this month that curtailed 7.2 million barrels of cumulative production. Operators aim to restore full output within a week.
Russian export capacity has been hampered by severe winter weather conditions affecting loading operations, while Venezuela’s production has declined following the U.S.-backed removal of President Nicolas Maduro earlier in January.
Compounding these international disruptions, an Arctic cold snap sweeping across major U.S. producing regions is estimated to have reduced American crude and condensate output by 340,000 barrels per day this month, according to JPMorgan’s analysis.
The convergence of geopolitical risk premiums, actual supply disruptions, and weather-related production cuts has created a complex trading environment where Friday’s diplomatic signals provided only temporary relief from a fundamentally tighter market structure than existed at the start of the month.
As the March Brent contract expires Friday, traders will be watching closely for any further evolution in U.S.-Iran relations and whether diplomatic engagement can provide a sustainable alternative to the military escalation that has rattled energy markets throughout January.
WHAT YOU SHOULD KNOW
Oil prices dipped on Friday on hopes of U.S.-Iran diplomatic talks, easing immediate fears of military strikes that could disrupt Middle East supply routes. However, both Brent and WTI crude are still headed for their biggest monthly gains in over two years—up roughly 12-15% in January—driven by escalating geopolitical tensions and separate supply disruptions in Kazakhstan, Russia, and Venezuela totaling 1.5 million barrels per day.
Despite the Friday pullback, oil markets remain fundamentally tight. Any actual military action—or closure of the Strait of Hormuz, through which a fifth of global oil flows—could send prices significantly higher, though analysts believe targeted strikes avoiding Iran’s oil infrastructure are more likely than all-out conflict.
