Iran v Israel, again
On Monday, we forecast that the front-month Brent futures contract would end the week between $71 and $74/bbl. As of Friday, 8:30am GMT (time of writing), the contract is trading at around $73.60/bbl, well within this target range, and is set for its first weekly gain since the end of November.
We retrospectively identify three key factors that have impacted oil prices this week:
- Israel planning to attack Iranian nuclear facilities
- Improving demand-side signals from China
- The market pricing in a US Fed cut next week
Oil prices witnessed a surge in volatility on Thursday on news that Israel was preparing for potential strikes against Iranian nuclear facilities. As per the Times of Israel, the Israel Defence Forces (IDF) believes the weakening of Iranian proxy groups in the Middle East and the overthrowing of the al-Assad regime in Syria earlier this week may encourage Iran to push ahead with its nuclear program – due to which Israel has increased its “readiness” to attack Iran. It will be vital to monitor whether a potential impact will also impact Iranian oil infrastructure, disrupting oil supply from the Persian Gulf and increasing prices.
China also contributed to this week’s strength. We began the week with China’s 24-man Politburo announcing a shift to loosening monetary policy and an expansion in fiscal policy. This development emerged following a series of recent stimulus measures, due to which the International Energy Agency (IEA) increased its 2025 global oil demand growth forecast to 1.1mb/d from 990bp/d last month. In addition, China’s crude oil imports jumped to 48.52 million metric tonnes in November, as per the General Administration of Customs data, up 14.3% y/y – adding to the supportive sentiment. Still, it is noteworthy that YTD crude oil imports were 1.9% lower. It will thus be essential to continue to track this measure for the time being and see how the Politburo’s latest stimulus measures alongside Saudi Arabia cutting its crude oil OSPs for Asia will impact China’s appetite for crude oil in the medium term.
Finally, according to CPI data, US inflation accelerated slightly in November, with core CPI printing a 0.3% rise m/m – which aligns with expectations. Coupling this with the US unemployment rate rising to 4.2% in November, the market is entirely pricing in a 25 basis point cut by the US Federal Reserve during their FOMC meeting on 18 December. An interest rate cut may weaken the US dollar, supporting dollar-denominated risk assets like oil.