Oil prices down 1% on escalating US-Iran tension, but set for biggest monthly gain. How to trade now?

Oil prices retreated more than 1% on Friday after touching multi-month peaks, yet are still set for their strongest gains in years, driven by a sharp rise in risk premiums amid fears that a potential U.S. strike on Iran could disrupt global supply.

Brent crude futures were down 91 cents at $69.80 a barrel, following a 3.4% jump on Thursday that took prices to their highest level since July 31. The March contract expires later on Friday, while the more actively-traded April contract slipped $1.07 to $68.52.

U.S. West Texas Intermediate crude declined $1.06 to $64.36 a barrel, after surging 3.4% in the previous session to settle at its highest level since September 26.

What's behind oil price weakness?

According to analysts, oil prices softened after the previous night’s rally as fears of a potential strike on Iran and a disruption to traffic through the Strait of Hormuz have so far failed to play out.

Geopolitical tensions have intensified amid a buildup of U.S. military forces in the Middle East. On Wednesday, U.S. President Donald Trump called on Iran to reach a nuclear agreement or risk military action, prompting Tehran to warn of strong retaliation.

The dollar advanced on Friday, trimming its weekly decline, after Trump said he would soon name his choice for Federal Reserve chair and on hopes that U.S. lawmakers would avert a government shutdown.

Both crude benchmarks are heading for their first monthly gains in six months, with Brent up 14.7%, marking its sharpest monthly rise since January 2022, according to Reuters. WTI has surged around 12% in January, its biggest monthly increase since July 2023.

Meanwhile, the Trump administration is holding separate discussions in Washington this week with senior defence and intelligence officials from Israel and Saudi Arabia on Iran, a Reuters report stated, quoting unnamed sources. U.S. officials added that while Trump is weighing his options, no decision has yet been made on launching a strike.

How to trade in crude oil?

According to brokerage firm Choice Institutional Equities, oil prices are less likely to be sustained at current levels, provided there is unwinding of the embedded premium, which could trigger a sharp price correction.

“Despite elevated oil prices, we expect OPEC+ to maintain its pause on output hikes at its upcoming meeting on February 1, 2026. Overall, we continue to expect Brent to average at USD 61.5/b in 2026 in the backdrop of increased competition as a result of (a) relentless supply of oil from the US, (b) gradual unwinding of cuts by OPEC+, and (c) possible removal of sanctions,” the firm said.

Speaking on the technical outlook, Rahul Kalantri, VP Commodities, Mehta Equities, said, “We expect crude oil prices to remain volatile in today’s session. Crude oil is having support at $62.55-61.00, and resistance is at $64.40-65.10 in today’s session. In INR crude oil has support at ₹5,720,-5,640, while resistance is at ₹5,880-5,965.”

(With inputs from Reuters)

Disclaimer: This story is for educational purposes only. Please consult with an investment advisor before making any investment decisions.