Oil Prices Plunge as Dollar Surges and Iran Tensions Cool
Oil markets experienced a sharp correction on Monday, with both crude and gasoline futures posting losses of nearly 5%. The dramatic pullback was fueled by a one-two punch of a strengthening U.S. dollar and receding fears of an immediate military escalation in the Middle East.
The dollar index climbed to a one-week high, making dollar-denominated oil more expensive for holders of other currencies and dampening demand. Concurrently, geopolitical headwinds eased after statements from both Washington and Tehran suggested a diplomatic path was being pursued. President Trump confirmed talks with Iran, while Iranian officials expressed hope that war could be averted. Reports indicated a planned meeting between U.S. envoy Witkoff and Iranian Foreign Minister Abbas Araghchi in Istanbul later this week.
Adding to the downward pressure was a notable jump in Venezuelan crude exports, which rose to 800,000 barrels per day (bpd) in January from 498,000 bpd in December, according to Reuters. This increase contributes to global supply at a delicate time for prices.
Background & Analysis: Monday's sell-off stands in stark contrast to the sentiment last Thursday, when crude hit a 5.75-month high. That rally was driven by President Trump's bellicose rhetoric, which raised the specter of a conflict that could disrupt supplies from OPEC's fourth-largest producer and potentially close the critical Strait of Hormuz. The rapid shift highlights the oil market's extreme sensitivity to Middle East headlines. Furthermore, the ongoing Russia-Ukraine war continues to provide a floor under prices, as Kremlin statements dashing hopes for a near-term peace deal ensure Western sanctions and associated supply disruptions will remain.
Market fundamentals present a mixed picture. The International Energy Agency (IEA) recently trimmed its forecast for a global crude surplus in 2026. However, the U.S. Energy Information Administration (EIA) raised its domestic production outlook for the same year. OPEC+ has reaffirmed its plan to pause collective output increases through the first quarter of 2026, as the group navigates a balancing act between restoring production cuts and managing an emerging surplus.
Supply-side risks persist. Ukrainian attacks on Russian refineries and tankers, coupled with new Western sanctions, continue to constrain Russian export capabilities. In the U.S., last week's EIA data showed crude inventories remain below the five-year average, though products are well-supplied. The domestic oil rig count has stabilized at a low level, suggesting limited near-term growth in production.
Market Voices
Eleanor Vance, Senior Commodity Strategist at Sterling Capital: "This is a classic 'buy the rumor, sell the news' scenario. The market had priced in a significant risk premium last week. The mere hint of dialogue was enough to trigger a substantial unwind. The underlying physical market, with draws in floating storage and below-average U.S. crude stocks, isn't as weak as today's price action suggests."
Marcus Thorne, Independent Energy Trader: "The dollar is the unsung story here. If the Fed's stance remains hawkish relative to other central banks, dollar strength will be a persistent weight on oil. Combine that with Venezuela ramping up and OPEC+ sitting on spare capacity, and the path of least resistance in the short term could be lower."
Rebecca Shaw, Portfolio Manager at Horizon Funds: "It's utter madness to see such volatility on whispers of diplomacy. This market is being held hostage by tweets and headlines. The real story is that we are still critically dependent on a volatile region for global supply, and no meeting in Istanbul changes that fundamental insecurity. The sell-off is an overreaction."
David Chen, Analyst at Global Energy Insights: "Traders are reassessing the geopolitical timeline. The possibility of a prolonged 'no war, no deal' stalemate between the U.S. and Iran is back on the table, which removes the immediate upside catalyst. Attention will now quickly return to inventory data and OPEC+ discipline for the next price signal."