Iranian crisis aids crude prices; Brent faces resistance at $68, WTI at $62

Crude oil rallies to 2-month high amid Middle East tensions and index rebalancing

Crude oil prices have caught market participants off guard this week, surging 9 per cent to reach a 2.25-month high, while gasoline prices simultaneously hit a 5-week peak. This aggressive rally marks a significant reversal from 2025, a year when oil was among the worst-performing commodities with a decline of over 20 per cent. The current upward trajectory is primarily driven by a toxic mix of heightened geopolitical risks in the Middle East, infrastructure disruptions in the Caspian region, and significant capital inflows from annual financial rebalancing.

Iranian unrest, threat of supply disruption

The primary catalyst for the price spike is the volatile situation in Iran, OPEC’s fourth-largest producer. Renewed geopolitical risk has intensified as thousands of protesters take to the streets across Iranian cities, reacting to a severe currency crisis and economic instability. The situation gained international friction following comments from President Trump supporting the protesters and indicating that military options have been briefed should the Iranian government’s crackdown continue.

 

Iran currently produces between 3.3 and 3.5 million barrels per day (mbpd), with exports averaging 1.5 to 1.8 mbpd. Historically, a supply-deficit expectation of 1 mbpd correlates to a $5 shift in market prices. With 1.5 to 2 mbpd of Iranian supply now deemed "at risk" due to potential internal collapse or US intervention, markets are currently pricing in a risk premium of $8 to $10 per barrel.

Strategic risks: The Strait of Hormuz, Caspian infrastructure

Beyond direct production, the threat to the Strait of Hormuz remains a critical "shield" for Iran and a nightmare for global trade. This narrow shipping lane handles 20-25 per cent of daily global oil trade and 20 per cent of global LNG exports. Furthermore, the region accounts for 23 per cent of global primary aluminum production , meaning any blockade would trigger a broader industrial crisis. Adding to the supply anxiety, recent drone attacks have disrupted the Caspian Pipeline Consortium terminal. This facility is vital for loading Kazakh oil onto tankers along Russia’s Baltic Coast, further tightening the immediate availability of crude in the global market.

Financial tailwinds: Index rebalancing, Chinese demand

Supporting the geopolitical rally is the annual rebalancing of major commodity indexes. The Bloomberg Commodity Index (BCOM) increased its crude oil weighting from 8.03 per cent to 8.36 per cent for 2026. This technical adjustment, combined with shifts in the S&P GSCI, is expected to trigger approximately $2.2 billion in inflows into oil futures contracts this week alone.

 

Simultaneously, China continues to act as a massive demand sink. Despite the rising prices, Chinese refiners capitalised on the lower averages of late 2025. December imports hit a record 13.18 mbpd—a 10 per cent month-over-month jump. While Russian supplies have recently begun to displace some Iranian barrels in Chinese ports, China’s overall drive to secure energy reserves amid US efforts to "choke" supplies provides a sturdy floor for global demand.

Market outlook: Resistance levels, long-term gluts

In the short term, crude is supported by a "perfect storm": the Iranian crisis, the refusal of US energy firms to invest in Venezuela without White House assurances, and the OPEC+ decision to pause production restoration until Q1-2026. We expect Brent to test resistance at $68 and WTI to challenge $62.

 

However, the long-term outlook remains cautious. Despite the current rally, the structural supply glut that plagued 2025 persists. The market exited last year with a 1.5 mbpd surplus, which is projected to expand to 2.5 mbpd by the first half of 2026. Unless geopolitical tensions lead to a sustained, physical loss of Iranian barrels, the underlying oversupply may eventually cap the current rally.

 

(Disclaimer: Mohammed Imran is a research analyst at Mirae Asset Sharekhan. Views expressed are his own.)