Iran Talks Dominate Prices as Tariffs and Supply Take a Backseat

Crude oil prices are up sharply this week - at the highest level since August 2025 - driven mainly by tensions between the US and Iran. The jump followed strong language from the White House tied to Iran's nuclear talks and military activity near the Strait of Hormuz. In addition to US-Iran talks, fuel market inventories and tariffs are factoring into the market's current activity.

US-Iran tensions are expected to continue driving prices. President Trump noted that if Iran does not make a deal, it "will be a very bad day for that Country." He also commented that a military conflict with Iran would be "easily won." Iran produces over 3 million barrels per day, around 3% of global production, so a potential conflict would put that supply at risk. Even though no oil supply has been disrupted, traders added a risk premium to prices, pushing crude to its highest level in several months.

In downstream markets, diesel prices are reacting more strongly than gasoline. ULSD futures jumped late last week as higher crude prices combined with tighter distillate supplies. US diesel inventories are drawing faster than expected, and refinery runs remain high. In total days of supply, diesel is back below 30 days - a key threshold that typically marks tighter markets - so markets will be closely watching the EIA's report this week to see if further cuts occur. Steep January draws are common, but the rate of decline is notable compared to the past several seasons.

Gasoline prices moved higher as well, but gains were smaller. Demand remains soft for this time of year, and gasoline inventories are more comfortable than diesel. With the market still in the winter shoulder season, gasoline prices have struggled to keep pace with diesel despite rising crude costs.

Of course, the major news of the week relates to tariffs, with the Supreme Court striking down the emergency tariffs enacted last year. The White House immediately responded with new 10%, then 15% tariffs to replace the old items. Financial markets initially surged, then sagged again when new tariffs were imposed. While energy products like crude, diesel, and gasoline are typically exempted from tariffs, the trade and broader economic impacts can affect fuel demand.

The bigger picture has not changed. For months, the market has been balancing strong supply from the US and OPEC+ against slower global demand growth. Those longer-term pressures are still there. However, over the last few trading days, geopolitics has clearly been in control. Until there is clarity on US-Iran relations, fuel prices are likely to stay volatile, with diesel continuing to lead gasoline.