U.S. heating oil futures slipped below $2.60 per gallon, retreating from monthly highs even as geopolitical risks in the Middle East intensified and U.S. inventory data pointed to tightening supply. The move reflects a classic “sell-the-fact” reaction after the Supreme Court struck down President Donald Trump’s emergency tariffs, triggering a relief rally that quickly gave way to profit-taking across energy markets. For investors, the divergence between supportive fundamentals and falling prices highlights how macro positioning can outweigh short-term physical balances.

Geopolitical Risk Meets Market Fatigue

Heating oil, a key distillate product closely linked to diesel demand and winter consumption, has been sensitive to developments surrounding Iran. Despite a record U.S. military buildup in the region and a 15-day ultimatum from Washington aimed at reaching a nuclear agreement, traders appear to be reassessing escalation probabilities.

Supply concerns remain concentrated around the Strait of Hormuz, through which a significant share of global petroleum flows. Yet markets are increasingly discounting worst-case scenarios, particularly as previous threats of disruption have not translated into sustained supply blockages. This recalibration has led to a cooling of the geopolitical risk premium embedded in distillate prices.

The result is a paradox: heightened rhetoric but softer prices. Investors are weighing the likelihood of de-escalation against actual supply interruptions, favoring tactical reductions in long exposure.

Inventory Draws Overlooked by Profit-Taking

The Energy Information Administration reported a substantial 4.57 million-barrel draw in distillate inventories alongside a 9 million-barrel decline in crude stockpiles. Under normal circumstances, such data would reinforce bullish sentiment, particularly during the winter heating season.

However, macro positioning appears to have dominated. With heating oil up more than 6% over the past month and trading near recent highs, traders opted to lock in gains. This dynamic underscores a broader theme in commodity markets: when sentiment becomes crowded, even supportive fundamentals may fail to sustain upward momentum.

Heating oil settled at $2.58 per gallon on February 20, down 1.22% on the day. Despite the pullback, prices remain 6.22% higher than a year ago. Historically, the commodity peaked at $5.86 per gallon in April 2022, reflecting the extreme volatility that can accompany geopolitical and supply shocks.

Weather, Volatility and the Road Ahead

Short-term demand factors remain relevant. A forecast cold snap in the U.S. Northeast could temporarily bolster heating demand, limiting downside risk. Yet broader market sentiment remains fragile, shaped by trade policy shifts and uncertainty around Iran negotiations.

The February deadline for diplomatic progress with Tehran looms, keeping volatility elevated. Traders are balancing physical tightness with macro crosscurrents, including dollar movements and broader risk appetite shifts across asset classes.

Looking ahead, heating oil prices will likely hinge on three factors: the trajectory of U.S.–Iran negotiations, sustained inventory trends, and late-winter weather patterns. If geopolitical tensions escalate into concrete supply disruptions, risk premiums could quickly reprice higher. Conversely, signs of diplomatic progress or continued macro profit-taking may keep prices testing lower support levels.

In an environment defined by rapid sentiment shifts, heating oil exemplifies how energy markets can move counterintuitively — not because fundamentals weaken, but because positioning adjusts faster than supply chains.