Crude Oil Edges Lower as Profit-Taking and Dollar Strength Intensify Market Headwinds

After climbing steadily for three consecutive trading sessions, crude oil reversed course on Friday, with traders choosing to lock in gains. Multiple pressures converged to trigger the pullback, including a surging U.S. dollar and mounting concerns over diplomatic solutions to U.S.-Iran tensions. WTI Crude Oil futures for March delivery retreated to $65.20 per barrel, representing a decline of $0.22, or 0.34%, from previous levels. The broader energy complex reflected investor caution as geopolitical and macroeconomic crosscurrents intensified.

Profit-Taking Drives Corrective Pullback in Oil Markets

The three-day rally had pushed sentiment into overbought territory, prompting traders to realize gains at current levels. After extended gains, market participants opted to take profits rather than hold through additional uncertainty. This pattern is typical when momentum-driven rallies face consolidation phases. The pullback suggests that while underlying bullish drivers remain present, near-term technical exhaustion prompted traders to exit long positions and reset positioning ahead of the next catalyst.

Dollar Strength Applies Sustained Pressure on Commodity Prices

The U.S. Dollar Index advanced to 96.75, gaining 0.47 points or 0.49%, marking its continuation of recent strength. A stronger dollar typically creates headwinds for dollar-denominated commodities like crude oil, as it raises the cost for foreign buyers and reduces demand from international markets. The inverse relationship between dollar movements and energy prices remained firmly in place, with the currency’s appreciation helping to cap any upside potential for oil. This dynamic has become increasingly influential as the Fed’s interest rate regime and monetary policy expectations continue to shape currency flows.

Government Financing Uncertainty and Policy Surprises Weigh on Sentiment

U.S. government operations face a potential shutdown as the midnight deadline for funding approaches. A compromise bill negotiated between Democrats, Republicans, and the White House—initially excluding Department of Homeland Security funding—requires Senate passage and subsequent House approval, with the House remaining in recess through the weekend. This legislative uncertainty creates a risk-off environment across markets, including energy commodities.

Meanwhile, the Trump administration’s nomination of former Federal Reserve Governor Kevin Warsh to eventually succeed Fed Chair Jerome Powell surprised market analysts. Given Warsh’s known preference for maintaining higher interest rates—contrasting with Trump’s historical advocacy for lower rates—the selection adds unpredictability to future monetary policy direction. Such policy reversals and appointments inject additional uncertainty into markets seeking clarity on the inflation and growth outlook.

Venezuela Oil Sanctions Relief and Supply Dynamics

The Trump administration announced a partial lifting of sanctions targeting Venezuela’s oil sector, enabling U.S. companies to conduct crude transactions. Recent developments included U.S. military involvement in Venezuelan leadership transitions, with the new government moving to liberalize its hydrocarbon policies and grant private companies greater control over production and sales operations. These moves predominantly benefit American energy interests and could reshape regional supply patterns.

The U.S. Energy Information Administration reported that commercial crude oil inventories declined by 2.3 million barrels during the week ending January 23, signaling modest tightness in domestic supplies (this figure excludes Strategic Petroleum Reserve holdings). This inventory reduction counters deflationary pressure but remains modest relative to the scale of potential supply disruptions.

Middle East Tensions and Strategic Chokepoint Risks

Despite escalating U.S. warnings to Iran regarding potential military action if nuclear negotiations stall, Iran has maintained its hardline stance. The planned execution of “live-fire drills” in and around the Strait of Hormuz—a critical transit point for approximately one-third of seaborne oil commerce—has alarmed shipping operators and commodity traders over potential supply interruption risks. A significant U.S. naval presence positioned near Iranian waters maintains a confrontational backdrop.

Turkey has offered to mediate between Washington and Tehran, suggesting diplomatic channels remain theoretically open, though substantive progress on nuclear program negotiations appears limited. The combination of military posturing and halted diplomacy creates an asymmetric risk environment favoring upside surprises to energy prices if tensions escalate toward direct confrontation.

China Demand and Global Import Trends

China accelerated its crude oil procurement during 2025 to reach an annual all-time high approaching 11.55 million barrels per day. December 2025 data indicated imports of 2.67 million barrels daily, representing a notable increase from November’s 1.88 million barrels per day. While China does not routinely disclose inventory statistics, these import volumes suggest ongoing strength in Asia-Pacific demand fundamentals, providing some counterbalance to demand destruction from developed markets.

Russia-Ukraine Ceasefire Agreement and Energy Market Implications

At Trump’s request, Russia agreed to suspend military operations targeting Ukraine until February 1. However, negotiations on a comprehensive peace framework remain stalled, with both parties maintaining rigid positions on territorial concessions. Any escalation beyond the agreed pause would introduce fresh supply-side risks, particularly for European energy markets and global price stability. The fragility of this arrangement adds another layer of unpredictability to the medium-term outlook for oil prices.