Oil prices down 6% as US-Iran de-escalation hopes cool market heat… Is it the end of the line for bulls?

[Ben Graham]

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Oil prices have slipped 6% today in what is a poor start to the month. This comes after an impressive rally in the month of January.

WTI finished January with gains of around 14% but that turned sour this morning with a 5% plunge in the Asian session. This sharp reversal appears to be driven by a combination of diplomatic shifts in the Middle East and strategic supply decisions by major producers.

The primary drivers behind the drop

The most immediate catalyst for the price drop is the sudden cooling of tensions between the United States and Iran. Just a week ago, markets were pricing in a significant risk of military conflict after US President Donald Trump hinted at potential strikes.

However, remarks made by the President on Sunday expressing hope for a new deal with Iran with a meeting scheduled for Friday this week which has dramatically pivoted investor sentiment.

The prospect of a diplomatic breakthrough suggests a potential easing of sanctions. If an agreement is reached, Iran, a major OPEC member, could legally return significant volumes of crude to the global market.

This "peace premium" being removed from the price of oil has led to a rapid sell-off, as traders re calibrate for a more well-supplied market than previously feared.

OPEC + maintains the status quo

Adding to the downward pressure, OPEC+ concluded its latest meeting with a decision to keep production levels unchanged for March. While the group’s "cautious approach" is intended to maintain market stability, it failed to provide the bullish spark some investors were hoping for. By reaffirming a freeze on planned production increases, OPEC+ signaled that they anticipate seasonally weaker demand in the coming months.

Taking a look at US drilling activity, it appears to be in a slump because low prices are making new investments less attractive for energy companies. Recent data from Baker Hughes shows that the number of active oil rigs held steady at 411 last week, which is significantly lower than this time last year.

While there was a tiny increase in gas drilling, the overall number of active rigs remains 36 below last year's levels. Because experts expect there to be more oil on the market than people actually need this year (a "surplus"), US oil production growth is expected to stay limited throughout 2026.

Forward Outlook - bulls or bears to prevail?

The future of oil prices currently hangs on two major variables: the reality of US-Iran diplomacy and the strength of the US dollar.

1. Geopolitical Volatility: While de-escalation is the current theme, financial institutions like DBS and Deutsche Bank warn that the situation remains fragile. Should diplomatic efforts fail or military rhetoric resurface, a renewed rally beyond the $70/barrel mark cannot be ruled out.
2. The "Warsh Effect": The US dollar has been gaining strength following the nomination of Kevin Warsh as the next Federal Reserve Chair. Because oil is priced in dollars, a stronger greenback makes the commodity more expensive for international buyers, creating a natural headwind for price growth.

In the short term, markets are looking toward upcoming US inventory data from the API and EIA to gauge domestic demand.

While the current trend is bearish, the structural risks in the Middle East suggest that the "pause" in the oil rally may be temporary rather than a permanent reversal.

For now, investors are moving with caution, balancing the hope of a diplomatic solution against the ever-present threat of supply disruptions. Keep an eye on developments between Iran-US when they meet on Friday in Turkey.

Technical Analysis - WTI

From a technical analysis standpoint, WTI drop is flirting with a close below the 200-day MA.

This would not be the first time that WTI has broken above the 200-day MA and reversed the move in a few days.

The last time WTI traded above the 200-day MA was in July 2025 when the price only managed to hold above the 200-day MA for two days before slipping back below for a prolonged period.

All is not lost for bulls though as the 100-day MA may provide the support that bulls are looking for as it rests on the psychological 60.00 handle, making this area a key confluence zone.

The period-14 RSI is just shy of the neutral 50 level and if it holds above this is a positive signs for bulls as it is seen as a sign of bullish momentum.

WTI Crude Oil Daily Chart, February 2, 2026

zoom_out_map

Source: TradingView (click to enlarge)

Key levels to keep an eye on

Support:

• 60.00
• 58.50
• 57.00

Resistance:

• 62.32
• 64.73
• 66.15

Follow Zain on Twitter/X for Additional Market News and Insights @zvawda

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