Oil markets have found stability after experiencing significant volatility, with crude prices dropping nearly 6% over two days as geopolitical tensions surrounding Iran showed signs of easing. However, market experts caution that medium-term risks remain tilted toward higher prices due to ongoing geopolitical uncertainties.

Market Positioning and Iran Concerns

Marko Papic, Chief Strategist at BCA Research, explained that oil markets entered the year with heavily bearish positioning. Floating storage levels were elevated, and traders had anticipated increased supply from regions including Venezuela. According to Papic, this optimistic outlook proved to be overdone, with Iran now emerging as the primary concern for market stability.

While immediate risks of US military action against Iran have diminished, Papic identified a more significant and uncontrollable factor: potential domestic unrest within Iran. "Iran is undergoing very significant protest and those protests could get out of hand and eventually they could cause domestic political chaos that's really uncontrollable," he stated during an interview with CNBC-TV18.

Price Projections and Regional Dynamics

MK Surana, former CMD of Hindustan Petroleum Corporation Limited, offered a more moderate perspective on oil price movements. He acknowledged that initial hard-line stances on Iran had added a risk premium to crude prices, but subsequent softening of rhetoric led to the significant price decline observed in recent days.

Surana emphasized that US military intervention in Iran would be considerably more complex than actions in Venezuela, citing Iran's superior military capabilities and determined regime. He also noted that key Arab nations are actively lobbying against potential conflict to protect regional trade interests.

Indian Oil Sector Outlook

Despite global uncertainties, the domestic oil sector presents a positive investment landscape. Surana provided reassuring insights for investors in Indian oil companies, highlighting the sector's strong fundamentals and ability to navigate the current environment effectively.

Key performance indicators for Indian oil companies include:

• Strong marketing margins supporting profitability
• Robust refining margins maintaining operational efficiency
• Healthy volume growth driving revenue expansion
• Well-positioned market stance for handling volatility

"As far as the Indian companies are concerned, as far as the investors are concerned, the marketing margins are good, the refining margins are good, the volumes have been good… and therefore I think the oil companies in India are well-placed," Surana explained.

Market Assessment

The recent price volatility reflects broader market reassessment of geopolitical risks and supply dynamics. While immediate military action concerns have receded, experts maintain that upside risks persist due to the unpredictable nature of domestic political developments in key oil-producing regions. The market's ability to quickly adjust pricing based on changing geopolitical narratives demonstrates the continued sensitivity of crude oil to regional tensions and supply disruption concerns.

Oil-linked stocks including ONGC, Oil India, Reliance Industries, Indian Oil Corporation, BPCL and HPCL are set to dominate investor attention on Friday following global crude prices' sharpest single-day fall in weeks. The roughly 4% drop in oil on Thursday snapped a five-day rally driven by geopolitical fears, reshaping the near-term outlook for upstream producers, refiners and oil-sensitive sectors from paints and aviation to tyres.

Crude Price Movement

Oil prices retreated after U.S. President Donald Trump said the crackdown on protesters in Iran was easing, tempering fears of imminent military action and potential supply disruptions from the Middle East. The price decline ended concerns about structural supply threats that had driven the previous week's rally.

Prices steadied early Friday, with Brent down 3 cents at $63.73 per barrel and WTI up 4 cents at $59.22 per barrel as of 0223 GMT. Both benchmarks had climbed to multi-month highs earlier in the week amid unrest in Iran and signals from Trump that strikes were possible.

Market Impact on Indian Stocks

The crude price movement is likely to ripple across Indian equities, affecting different sectors in varying ways. Upstream companies such as ONGC and Oil India typically track oil prices closely, while refiners including Indian Oil, BPCL and HPCL tend to benefit from softer crude through improved margins. Reliance Industries, with its integrated oil-to-chemicals business, also remains in focus alongside oil-sensitive sectors such as paints, aviation and tyres.

Choice Institutional Equities noted that Brent prices fell over 4% on January 15 after an 11% rally the previous week, during which "geopolitical risk premiums climbed as concerns shifted from oversupply to structural supply threats, driven by unrest in Iran, repeated Black Sea tanker attacks, and heightened prospects of U.S. military intervention."

Supply Dynamics and Market Outlook

The brokerage highlighted several supply-side factors affecting the oil market. Nigeria missed its OPEC+ production quota for a fifth straight month, while U.S. oil output remained elevated, averaging 13.81 million barrels per day in the week of January 2, about 2% higher than a year earlier.

Choice Institutional Equities assessed that "provided supply disruptions, whether geopolitical or operational, evolve into sustained and systemic constraints oil prices are likely to find sustained support. However, we expect that broad oversupply, underpinned by resilient US production and expanding inventory levels, would likely keep upward pressure on prices subdued."

Refining Margins and Policy Outlook

The brokerage continues to see gross refining margins for Indian refiners remaining elevated for Q4FY26, noting that quarter-to-date Brent prices still average $62.81, down 16% year-on-year. On policy matters, the upcoming Indian budget is expected to include measures aimed at upstream activity, particularly as the bid submission deadline for OLAP Round X has been delayed by over a year, "underscoring the need for renewed policy impetus to catalyze exploration and production investment."

Looking ahead, Choice Institutional Equities expects "Brent to average to $61.50 per barrel in 2026 in the backdrop of increased competition as a result of relentless supply of oil from the US at lower prices, gradual unwinding of cuts by OPEC+ and possible removal of sanctions on Rosneft and Lukoil." For investors, the sharp reversal in crude has brought oil-linked names back into sharp focus, with near-term sentiment likely to hinge on whether geopolitics or oversupply ultimately sets the tone for prices.