Instability in the Middle East
The front-month (February 2025) Brent futures contract weakened below $71/bbl on 06 Dec, dipping under the boundary of the symmetric triangle within which the M1 futures contract has oscillated since September (attached). As of Monday, 15:30 GMT (time of writing), the futures contract has climbed to $72.60/bbl, moving around this boundary. We expect Brent to close between $71/bbl and $74/bbl this week as the market evaluates the impact of the following three factors:
- Rising Uncertainty in the Middle East
- Loosening Monetary Policy in China
- US inflation data due ahead of this year’s final Fed FOMC meeting
The past weekend saw a surge in regional instability in the Middle East following a successful push by rebel groups, including the militant group Hayat Tahrir al-Sham, to drive Syrian President Bashar al-Assad out of power after 14 years of rule. Given Syria’s geographical location, this may inject further geopolitical risk premium into oil prices. The country borders Turkey, Iraq, Israel, Lebanon and Jordan, with only Jordan not currently in conflict (external or internal). Additionally, Israel continues to strike “strategic weapons systems” in Syria and has seized territory in Syrian-controlled areas of the Golan Heights. An Iranian crude cargo bound for Syria made a U-turn in the Gulf of Suez amid this uncertainty – highlighting how the political instability may impact oil trade in the region.
On the demand side, China continues to showcase troubling economic data, with its November CPI falling 0.6% m/m (Oct: -0.3% m/m). Additionally, Fitch has cut its GDP forecast for China to 4.3% in 2025 (prev: 4.5%) and 4.0% in 2026 (prev: 4.3%). In an attempt to support the economy, China’s 24-man Politburo plan to loosen monetary policy and expand fiscal spending in 2025, as per state media. This strategy marks Beijing’s first significant shift towards a loosened monetary policy since 2011. Financial markets will also be awaiting this week’s Central Economic Work Conference for further direction on economic policy in 2025, which may impact expectations for China’s oil demand in the new year.
Finally, on the other side of the world, US Overnight Index Swaps (OIS) are currently pricing 21 basis points of cuts at next Wednesday’s Fed FOMC meeting. The US labour market took a breather following last Friday’s non-farm payrolls data rebounding from a hurricane-impacted slowdown in October. Still, the labour market has displayed signs of cooling, with the unemployment rate rising to 4.2%, which may encourage the Fed to cut rates next week. It will be, therefore, vital to monitor this week’s CPI and PPI data to shape up expectations of the Fed’s decision next week.
