Oil prices rise more than 1% on escalating US-Iran tension. More upside ahead?

Oil prices jumped nearly 1.5% on Thursday, extending their bull run to the third consecutive day amid growing fears that the U.S. could launch a military strike against Iran, a major Middle East crude producer, potentially disrupting regional oil supplies.

Brent crude futures advanced 99 cents, or 1.5%, to $69.39 a barrel, while U.S. West Texas Intermediate crude rose $1.06, or 1.7%, to $64.27 a barrel. Both benchmarks are up around 5% since Monday and are trading at their highest levels since September 29.

What's driving the rally in crude oil prices?

The crude oil prices rallied as U.S. President Donald Trump stepped up pressure on Iran to halt its nuclear programme, including threats of possible military action, while a U.S. naval task force has entered the region. Iran is OPEC’s fourth-largest producer, pumping around 3.2 million barrels per day.

According to a Reuters report, Trump is weighing options to target Iranian security forces and senior leaders in an effort to spark protests that could eventually undermine the current regime.

Meanwhile, the US Federal Reserve left interest rates unchanged on Wednesday, supported by indications of a resilient U.S. economy. Lower interest rates generally reduce borrowing costs, boosting oil consumption and lending support to prices.

U.S. crude inventories declined by 2.3 million barrels to 423.8 million barrels in the week ended January 23, the Energy Information Administration reported on Wednesday, according to a Reuters report.

“Oil rose to a fresh four-month high after the U.S. President threatened another attack on Iran, urging Tehran to negotiate a nuclear deal. Moreover, the U.S. Fed elected to hold the federal funds rate, providing further support to oil prices,” said Choice Institutional Equities.

Where are crude oil prices headed?

The brokerage firm said that the market is baking in about $6/b of geopolitical risk premium, largely reflecting constrained Russian barrels ($3/b) and residual disruption risk from Iran ($3/b).

“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,” it said.

The brokerage firm further anticipates 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, it added.

Meanwhile, Rahul Kalantri, VP Commodities, Mehta Equities, said that crude oil prices are likely 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 Rs5,720,-5,640 while resistance is at Rs5,880-5,965,” Kalantri said.

(With inputs from Reuters)

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