Gold & Silver Plunge: Is the Bull Market Over?

Oil prices edged slightly lower on Friday, consolidating gains near six-month highs as the market continues to be swayed by persistent geopolitical tensions between the United States and Iran.

Brent crude futures settled at $70.69 a barrel, down a marginal 2 cents, or 0.03%. Meanwhile, U.S. West Texas Intermediate (WTI) crude ended the session at $65.21 a barrel, a decline of 21 cents, or 0.32%. Despite the small dip, both benchmarks are set for their largest monthly gains since 2022.

US-Iran Standoff Dominates Market Focus

The primary driver for oil markets remains the tense situation involving Iran. "It's really all about Iran right now," said John Kilduff, a partner with Again Capital. "The market had priced in a lot of geopolitical risk on Iran, but it's difficult to quantify the market at this point."

Prices had surged to their highest levels since early August on Thursday after reports that U.S. President Donald Trump was considering actions against Iran, including targeted strikes, which heightened concerns over potential supply disruptions.

While both nations have since indicated a potential willingness to engage in dialogue, significant hurdles remain. Tehran stated Friday that its defense capabilities are not up for discussion. Adding to the pressure, the U.S. issued new sanctions targeting seven Iranian nationals and at least one entity as it reinforces its military presence in the Middle East.

Phil Flynn, a senior analyst with Price Futures Group, noted that the recent price gains have paused amid "prospects of a chilly ceasefire between Russia and Ukraine and the possibility that an attack on Iran might not occur."

Economic and Supply Factors Add Pressure

Beyond the geopolitical arena, other factors are beginning to weigh on oil prices.

Dollar Strength Creates Headwinds

A stronger U.S. dollar, which rose from four-year lows, put some pressure on crude. The dollar gained strength after President Trump announced he would nominate former Federal Reserve Governor Kevin Warsh to lead the central bank once Jerome Powell's term concludes in May. A stronger dollar can curb demand for oil by making it more expensive for buyers using other currencies.

Global Supply Picture Shows Easing

Signs of increasing oil supply also contributed to the shift in market sentiment. Key developments include:

• Rising U.S. Production: American crude oil output is recovering following recent shutdowns.

• Kazakhstan Resumption: Production at the Tengiz oilfield is nearing a restart.

• Russian Maintenance: Russia's primary oil refining maintenance periods are expected this month and again in September.

"Given the week's bullish performance, it is reasonable to expect some profit-taking ahead of the weekend," said Tamas Varga, an analyst at PVM Oil Associates.

Analyst Outlook: Oversupply vs. Geopolitical Risk

Looking ahead, market analysts are balancing the risk of supply disruptions against the prospect of oversupply. A Reuters poll of 32 analysts concluded that most expect oil prices to hold near the $60 per barrel mark for the year, reflecting this delicate equilibrium.

Germany’s inflation rate accelerated in January, challenging the European Central Bank’s decision to cut interest rates just one day prior.

Official data released Friday showed consumer prices in Germany rose by 2.1% last month, an increase from the 2.0% rate recorded in December. The figure surprised analysts who had anticipated that inflation would remain unchanged.

The timing of the data is critical. On Thursday, the ECB lowered its key interest rate by a quarter percentage point to 2.75%, marking the fifth consecutive reduction since June. Despite the cut, central bank officials described their policy as "restrictive" and suggested that further reductions could be on the table.

Eurozone Economy Shows Surprising Strength

The slight uptick in German inflation, Europe's largest economy, comes as the broader eurozone demonstrates unexpected resilience. Inflation across the currency bloc has stabilized near the ECB's 2% target, and consumer surveys indicate expectations for prices to continue rising at a similar pace over the next year.

Economic growth in the final quarter of 2025 exceeded forecasts across major economies:

• Spain: 0.6% expansion

• France: 0.5% expansion

• Germany: 0.3% expansion

• Italy: 0.1% expansion

The overall eurozone economy grew by 0.3%, matching Germany's performance.

Interest Rate Forecast: Stability Expected Through 2027

Despite the conflicting signals from inflation and growth, the market consensus points toward a period of policy stability. Most economists predict that the ECB will hold borrowing costs steady at their current level through at least the end of 2027. Previous speculation about a potential rate hike in 2026 has largely subsided.

This view is echoed by key policymakers. Joachim Nagel, President of Germany's Bundesbank, recently stated there is no immediate need to adjust interest rates, though he cautioned that long-term predictions are difficult.

The ECB's upcoming meetings will force officials to weigh the minor increase in German inflation against the region's recent economic strength, all while navigating ongoing concerns related to trade and the war in Ukraine.

Source: Reuters

The European Union is preparing for a significant escalation in its economic pressure on Russia, targeting the core of its oil trade with a potentially simpler and more forceful mechanism.

According to Bloomberg sources, Brussels is considering a move to abandon its Russian oil price cap in favor of a complete ban on maritime services. If enacted, this would prohibit European companies from providing insurance, shipping, and transport for any Russian oil cargoes, regardless of price, effectively closing a major loophole in the current sanctions regime.

From Price Cap to Outright Ban

The existing price cap was designed as a dual-purpose tool: to keep Russian oil on the global market to prevent price shocks while simultaneously cutting into the Kremlin's revenue. While elegant in theory, its real-world implementation has proven messy and difficult to enforce.

The system's effectiveness relies heavily on documentation and declarations in a global oil trade where such oversight is notoriously challenging, making it easy for traders to circumvent the rules.

A blanket ban on services would be a much blunter instrument, simplifying enforcement and making it significantly harder for Russia to work around the sanctions. European officials believe this shift would tighten economic pressure at a critical time, as Russia's oil and gas revenues have already hit a five-year low due to weak prices and an expanding web of sanctions.

Why the Current Sanctions Model Is Failing

The push for a new strategy comes as the EU recognizes the limitations of its current approach. The price cap is scheduled to drop to $44.10 per barrel on February 1, but there is growing awareness within the bloc that merely adjusting the price does little to curb Moscow's income as long as oil continues to move through shadow fleets and opaque channels.

Recent EU measures targeting refined products made from Russian crude have already compelled refiners in Turkey and India to reduce their purchases. Although China has absorbed some of this supply, it has primarily been through smaller "teapot" refineries that demand steep discounts.

While these actions have squeezed Russia's revenues, they have not stopped its oil from reaching the market. A full services ban would push even more of Russia's oil into these high-friction, discounted trade routes and make it more difficult for sanctioned barrels to re-enter Europe through blending or relabeling.

Securing Unanimity Remains a Hurdle

Despite the strategic appeal, implementing a services ban is not a straightforward process. The move requires unanimous consent from all EU member states, and some nations remain hesitant.

Concerns about potential market disruption and Russian retaliation are significant obstacles. The debate is further complicated by Europe's own energy reality: while the continent’s crude oil imports fell by nearly 9% last year, its reliance on expensive liquefied natural gas (LNG) imports surged.

Warsh Nomination Buzz Shakes Bond Market

U.S. long-term Treasury prices fell on Friday after President Donald Trump indicated he would nominate former Federal Reserve Governor Kevin Warsh to lead the central bank. The potential appointment is viewed as a bearish signal for bonds, given Warsh's known preference for a smaller Fed balance sheet.

Bond yields, which move opposite to prices, initially pared some of their declines in afternoon trading as volume thinned. However, the prospect of Warsh at the helm prompted a reassessment of future policy support, putting upward pressure on longer-dated Treasury yields.

Warsh has previously advocated for a "regime change" at the Fed, including a reduction in quantitative easing. A push to shrink the central bank's bond portfolio would increase the supply of Treasuries on the market, directly impacting their yields.

Why a Smaller Balance Sheet Matters

A more aggressive approach to reducing the Fed's balance sheet is a primary concern for bond investors.

"If the smaller balance sheet becomes a primary focus, then keeping all things equal, that would put upward pressure on your longer-term bond yields just because you would have that extra supply out there in the Treasury market," explained Jim Barnes, director of fixed income at Bryn Mawr Trust.

However, Barnes suggested this may not be an immediate priority. "I just don't think that's going to be the focus coming out of the gate," he noted. "There's going to be other things that's going to be reviewed, most notably the inflation side and the labor market side of the dual mandate, and trying to figure out what to do with short-term rates."

Some analysts also believe Warsh's previously hawkish positions could counterbalance concerns that he might simply align with President Trump's calls for rate cuts.

A Look at the Market Reaction

The news triggered noticeable shifts across the Treasury yield curve:

• 30-Year Treasury Yields: The long bond yield (US30YT=RR) jumped by as much as 6 basis points (bps) to a session high of 4.914%. It later settled at 4.872%, up 1.7 bps on the day. This puts it on pace for its largest weekly rise since late December and marks its third consecutive monthly increase.

• 10-Year Treasury Yields: The benchmark 10-year yield rose 1.2 bps to 4.239%, contributing to a 9-bp rise for the month of January.

• Yield Curve: The spread between the two-year and 10-year yields steepened to 71.50 bps, its widest in over a week. The curve was last at 71.3 bps.

• Two-Year Treasury Yields: In contrast, the two-year yield (US2YT=RR) fell 2.5 bps to 3.527%, recording its largest weekly drop since mid-November.

Inflation Data and Fed Independence in Focus

Adding to the pressure on bonds, new data showed U.S. producer prices increased more than anticipated in December. The Producer Price Index (PPI) rose 0.5% for the month, well above the 0.2% forecast by economists polled by Reuters. On an annual basis, the PPI was up 3.0%.

Beyond the data, investors are also weighing the implications for Federal Reserve independence. While Warsh is a Trump nominee, analysts caution against overstating his potential immediate impact on monetary policy.

"We remind investors that one vote will not be enough to change the course of monetary policy," said Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers Solutions. He noted that with only two policymakers voting for a cut at the last meeting, "Warsh would require significant sway to bring other voting members in line."

Following the week's events, U.S. rate futures are now pricing in approximately 51 bps of monetary easing this year, equivalent to about two 25-bps rate cuts. This is an increase from the 44 bps priced in after the Fed's decision last week to hold rates steady.

Source: Yahoo Finance