Oil prices extended sharp gains on Thursday, reversing early losses, as investors weighed the impact of fresh U.S. military strikes on Iranian targets and assessed data showing a significant drawdown in U.S. crude stockpiles. The rally is being driven by a convergence of escalating geopolitical risk and tightening physical supplies, with both factors reinforcing each other.

As of 03:05 ET (07:05 GMT), Brent Oil Futures expiring in September climbed 2.6% to $93.10 per barrel, while West Texas Intermediate (WTI) crude futures rose 1.3% to $85.57 per barrel. The rally built on Wednesday's session, during which Brent futures surged nearly 8% and WTI settled 6.6% higher.

The U.S. military announced late on Wednesday that it had conducted a heavy wave of strikes against dozens of Islamic Revolutionary Guard Corps (IRGC) targets across Iran. The strikes hit military command centers, missile and drone facilities, and coastal surveillance and defense sites. The direct targeting of facilities inside Iran — itself a major OPEC producer — marks a significant escalation, raising the possibility that Iranian crude exports could become entangled in the conflict.

The escalation followed Iran's launch of ballistic missiles toward U.S. forces in the Middle East, effectively ending hopes for a diplomatic breakthrough. The missiles were intercepted, after which U.S. and Saudi forces carried out retaliatory strikes against Iran-backed militias in Iraq. Washington stated that these militias were involved in attacks on American troops and Saudi energy infrastructure.

U.S. President Donald Trump told Fox News on Wednesday that Iran would be hit "very hard" following Tehran's missile attack on U.S. forces in Jordan.

The conflict has spread beyond the Gulf region. Egyptian authorities reported drone strikes on two natural gas vessels operating off the country's coast. In Yemen, the Iran-aligned Houthis have intensified attacks on commercial shipping and Saudi-linked energy assets around the Red Sea and the Bab el-Mandeb Strait. The group has sought to enforce what it calls a naval blockade on vessels transiting the waterway, raising fresh concerns over shipping costs and insurance premiums.

The Bab el-Mandeb is one of the world's most critical maritime chokepoints, linking the Red Sea to the Gulf of Aden and carrying millions of barrels of crude and refined products each day. These disruptions come as traffic through the Strait of Hormuz — through which roughly a fifth of global oil consumption normally flows — remains well below normal levels. With two major maritime chokepoints under simultaneous pressure, the geopolitical risk premium embedded in crude prices has widened considerably.

Providing further support to oil prices, the U.S. Energy Information Administration reported that crude inventories fell by 7.2 million barrels last week, reaching their lowest level since 2018. The drawdown defied market expectations of a 700,000-barrel rise. Gasoline inventories were virtually unchanged at 211.3 million barrels despite stronger implied demand, while distillate fuel inventories — which include diesel and heating oil — rose by 1.1 million barrels.

With commercial stockpiles at multi-year lows, the world's largest oil consumer has a thinner buffer to absorb any sudden supply interruption, leaving the market more sensitive to headlines from the Middle East. The inventory data reinforced expectations of tighter near-term supplies, compounding the geopolitical risk that has driven much of the recent rally.

Source: Investing.com