Oil Prices Climb Amid Iran Supply Risks and Mixed Global Supply Signals

Japan's Defense Minister, Shinjiro Koizumi, has confirmed that Tokyo will implement appropriate countermeasures in response to China's decision to restrict exports of military-applicable dual-use items.

Speaking from the Honolulu Defense Forum, Koizumi stated that Japan is demanding a complete reversal of the ban. The new Chinese policy, announced last week, affects the sale of over 800 items, including critical rare earth minerals, to end-users that could potentially enhance Japan's military capabilities.

Assessing the Economic and Military Impact

While Japan's government is still analyzing the full scope of China's export controls, the move has already raised significant concerns.

"There are many unclear aspects regarding the scope and content of these measures," Koizumi said. "I will refrain from commenting on their impact on the defense industry at this time. However, after careful analysis, we will consider necessary responses."

Beijing's action is widely seen as an attempt to leverage its dominance in the rare earths market. These materials are essential for a wide range of modern products, from electric vehicles and smartphones to advanced missile systems. China has framed the export limit as a measure to curb a military threat from Japan.

Geopolitical Tensions Over Taiwan

The export restrictions are part of a broader series of pressure tactics linked to the ongoing dispute over Taiwan. Tensions between Asia's two largest economies flared in November after comments from Japanese Prime Minister Sanae Takaichi, who suggested Japan might deploy its military if China attempts to take Taiwan by force.

In response to the growing weaponization of supply chains, finance ministers from the Group of Seven (G7) nations met in Washington on Monday. The agenda focused on addressing "vulnerabilities in critical minerals supply chains," a direct challenge to the leverage China holds in global trade and geopolitical negotiations.

The US-Japan Alliance in Focus

The United States, Japan's closest ally, has remained publicly quiet on the matter. When asked if he sought more explicit backing from Washington, Koizumi avoided a direct answer, instead reinforcing the strength of the bilateral relationship.

"We will continue to overcome challenges together and move forward side by side. That will not change," he affirmed.

Earlier in the day, Koizumi delivered a speech in which he condemned the "weaponization of everything." He argued that the lines between peacetime and conflict—and between military and non-military domains—are becoming dangerously blurred.

"The weaponization of economy, technology, resources, information and cyberspace," Koizumi warned, has made it difficult to distinguish "truth and fake news."

The defense minister's stop in Hawaii precedes a trip to Los Angeles to meet with defense companies. He is then scheduled to meet with Defense Secretary Pete Hegseth in Washington on Thursday.

Oil prices pushed higher for a fourth consecutive session in Asian trading on Tuesday, driven by mounting fears of supply disruptions from key geopolitical hotspots.

Brent crude futures for March delivery climbed 0.4% to $64.10 a barrel, a level not seen in over seven weeks. West Texas Intermediate (WTI) crude futures saw a similar 0.4% gain, reaching a one-month high of $59.70 a barrel.

Iran Unrest Shakes Global Oil Supply Outlook

The primary catalyst for the rally is the escalating anti-government unrest in Iran, a major OPEC producer. The demonstrations, the largest in years, have turned violent, with reports of significant casualties as security forces respond.

This internal turmoil has introduced a substantial risk premium into the market. The situation has drawn a sharp response from the United States, with President Donald Trump warning of potential military action if Iranian authorities continue using lethal force.

Further escalating economic pressure, Trump announced plans for a 25% tariff on any nation conducting business with Tehran. This move puts a spotlight on major buyers like China. "Whether this secondary tariff threat is sufficient to push China away from Iranian oil remains to be seen," noted analysts at ING in a research note.

President Trump is reportedly scheduled to meet with senior advisers on Tuesday to weigh his options regarding Iran.

Compounding Pressure from Russian Export Disruptions

Supply anxieties are not confined to the Middle East. The ongoing conflict in Ukraine continues to impact Russia's oil export capabilities, adding another layer of concern for the market.

Ukrainian attacks have targeted Russian oil facilities and export hubs, including the critical Caspian Pipeline Consortium (CPC) terminal near Novorossiysk.

According to Bloomberg, this will put significant pressure on Kazakh oil exports this month. Shipments from the CPC terminal are now projected to be between 800,000 and 900,000 barrels per day—approximately 45% below original forecasts.

Venezuela Prepares for a Potential Market Re-entry

While supply risks are dominating headlines, developments in another OPEC member, Venezuela, could eventually add barrels back to the market. Following recent political shifts and the capture of President Nicolas Maduro, the country is preparing to resume oil exports after a period of disruption.

President Trump announced last week that Caracas is expected to transfer up to 50 million barrels of oil to the United States, a move that could eventually ease global supply tightness if it materializes.

U.S. consumer prices are expected to show a marked acceleration in December, a development that will likely solidify the Federal Reserve's decision to hold interest rates steady this month. However, the anticipated jump in inflation is largely a statistical rebound, correcting for data distortions caused by a prior government shutdown that made November's figures appear artificially low.

Unpacking the Shutdown's Impact on CPI Data

The 43-day government shutdown created significant challenges for data collection. The Bureau of Labor Statistics (BLS) was unable to gather price data for October and instead used a "carry-forward" method to compile the November CPI report. This technique, which essentially treated October prices as unchanged, resulted in an underestimation of inflation.

These distortions were particularly evident in rental market data and goods prices. The upcoming December report is expected to correct some of these statistical anomalies, revealing a clearer picture of underlying price pressures. This follows recent labor market news showing a dip in the unemployment rate despite modest job growth.

Oscar Munoz, chief U.S. macro strategist at TD Securities, noted that while a "meaningful payback" is expected, the full reversal won't be immediate. He specified that the distortions in rent data will not be fully resolved until the April 2026 report.

What to Expect in the December Inflation Report

Economists surveyed by Reuters predict the Consumer Price Index (CPI) rose by 0.3% in December, driven by higher costs for food and energy, particularly electricity for data centers. On an annual basis, CPI is forecast to have increased by 2.7%, matching the gain seen in November.

When stripping out volatile food and energy components, the core CPI is also projected to have risen by 0.3% for the month. This would push the year-over-year core inflation rate to 2.7%, up from 2.6% in November. For context, the BLS estimated that both headline and core CPI increased by 0.2% between September and November.

Rising inflation has become a key political issue, affecting President Donald Trump's approval ratings ahead of the 2026 congressional elections.

Broader Price Pressures and Persistent Distortions

Beyond the shutdown-related noise, economists anticipate the December data will reveal a gradual pass-through of the Trump administration's tariffs into consumer prices. While businesses have absorbed some of these costs, the underlying inflationary trend that existed before the shutdown is expected to re-emerge.

An acceleration is anticipated across several categories, including:

• New motor vehicles

• Furniture

• Apparel

"The rebound in goods prices is likely to be more pronounced than in services given the sector's wider prevalence of holiday discounting," said Sarah House, a senior economist at Wells Fargo. She added that services prices should also bounce back, especially in seasonal categories like lodging and airfares.

The BLS has explained that its methodology for calculating rent and owners' equivalent rent, which uses a 6-month panel, is the reason for the delayed correction. The effects of the carry-forward imputation from October 2025 will only fully resolve when that housing panel is revisited in April 2026.

Federal Reserve Outlook Amid Political Tensions

The Federal Reserve, which targets 2% inflation based on the Personal Consumption Expenditures (PCE) Price Index, is widely expected to keep its benchmark interest rate in the 3.50%-3.75% range at its January 27-28 meeting.

The economic outlook is further complicated by political tensions. Most economists do not foresee a rate cut before Fed Chair Jerome Powell's term ends in May, partly due to an escalation of conflict with President Trump. The Trump administration has initiated a criminal investigation into Powell, which the Fed chief has labeled a "pretext" to influence monetary policy.

"We have a lot of manufactured uncertainties generated by Washington, that is obviously not good for the economy, and ultimately, I think that could lead to a higher inflation," commented Sung Won Sohn, a finance and economics professor at Loyola Marymount University. "We want low interest rates, but this is not the way to do it."

The United States and Taiwan are nearing a significant trade agreement, with Taipei reporting that a "broad consensus" has been reached on new tariff structures. A source close to the negotiations suggests a final announcement could be made by the end of January.

Talks Center on 15% Tariff Target

Taiwan’s primary objective in the talks is to reduce the tariff rate on its exports to the U.S. from 20% to 15%. According to a statement from Taiwan's Office of Trade Negotiations, this goal is now within reach as both parties have aligned on the key issues. It is important to note that Taiwan's crucial semiconductor exports are not currently subject to these U.S. tariffs.

The two sides are now focused on scheduling a final meeting to conclude the deal. A source familiar with the matter stated, "It's now just a matter of getting all the final details in order."

TSMC Investment a Key Point of Discussion

Alongside tariff reductions, technology and manufacturing commitments appear to be central to the negotiations. Taiwan, a global leader in semiconductor production, has consistently offered to help the U.S. replicate its successful model of building tech clusters around dedicated science parks.

A recent report from the New York Times indicated that the Trump administration is pushing for a commitment from chipmaking giant TSMC to construct at least five additional facilities in Arizona as part of the broader deal.

When asked about potential new investments, TSMC declined to comment beyond its previously announced pledge of $165 billion for its U.S. operations. The Office of the United States Trade Representative did not provide an immediate response when contacted for comment.

Germany is in the middle of a historic rearmament, committing over €500 billion ($586 billion) to its military by 2029. This massive investment will push its defense spending to 3.5% of GDP six years ahead of NATO's target, a move that the alliance has publicly praised.

Yet behind the official applause, a deep-seated unease is growing across Europe. The re-emergence of the Bundeswehr as a dominant continental power is stirring old anxieties, especially as Germany's far-right nationalist party climbs to record highs in opinion polls. This political shift has raised questions about whether Berlin's pro-European stance can be guaranteed in the long term.

Nowhere is this tension felt more acutely than in France, a nation that has long prided itself on having one of Europe's most capable militaries and its only independent nuclear deterrent.

A Mix of Relief and Anxiety in Paris

The French reaction to Germany's military expansion is deeply conflicted. On one side, there is relief that Berlin is finally sharing more of the security burden. On the other, there is growing anxiety that Germany's massive spending power could sideline France's own defense industry and diminish its political influence.

Four French officials, speaking anonymously, confirmed a general sense of apprehension about Germany's rising military might and the political leverage that accompanies it.

"France is in a fragile situation, and the fact that Germany is committing with such determination will of course create a dynamic that could leave us on the side of the road," warned François-Xavier Bellamy, a French member of the European Parliament. "The domestic fragility is weakening France's geopolitical heft."

Bellamy, a member of the center-right EPP group and a vocal advocate for a "Buy European" policy in defense, acknowledges the contradiction. "France has long complained about doing the job alone," he noted.

The Old Franco-German Balance Is Dead

For decades, European stability rested on an unspoken agreement: France would serve as the continent's geopolitical leader, while Germany would be its economic engine. According to Claudia Major, a senior vice president at the German Marshall Fund, this balance is now being upended.

"Germany didn't want to be a political giant," Major explained. "Now Germany is doing both, as well as making an effort to embed its new power within Europe. This puts France in a difficult position. Their anxiety says more about France itself than about Germany."

Under Chancellor Friedrich Merz, Germany effectively set aside its strict borrowing limits for military spending to fund its rearmament and counter a more aggressive Russia. While Nordic, Baltic, and Polish governments are also making significant defense investments, few can match the sheer speed and volume of Germany's spending. In contrast, historical military powers like France, Italy, and Spain have far less fiscal room to maneuver.

Frictions in European Defense Cooperation

Despite Germany's efforts to coordinate its military buildup with allies, tensions have already surfaced. France felt pointedly excluded when former German Chancellor Olaf Scholz introduced the European Sky Shield Initiative, a project to purchase missile-defense systems. The frustration in Paris intensified when Scholz later announced a €10 billion deal to buy 35 American-made F-35 fighter jets instead of a European alternative.

While weapons purchases from the U.S. have reportedly slowed under Merz, collaboration with France remains difficult.

The Future Combat Air System (FCAS), Europe's most ambitious joint defense project, is on the brink of collapse. After years of talks, French manufacturer Dassault Aviation SA and Airbus SE, representing German interests, have failed to agree on production shares for the next-generation fighter jet.

Germany's New Influence in NATO

With its growing military budget, Germany is gaining more clout within both the EU and NATO. Berlin has already proposed an expanded role for the European Defense Agency, which is currently led by a German general. Inside NATO, U.S. officials have reportedly joked that the alliance's top military position—Supreme Allied Commander Europe, always held by an American—might one day go to a German.

Germany is also best positioned to provide crucial "strategic enablers" for Europe, such as missile defense, space intelligence, and logistics—capabilities for which the continent currently depends almost entirely on the United States.

"We hope Germany will further develop strategic enablers for the alliance," said General Markus Laubenthal, a high-ranking German general in NATO. "It makes sense to work with key European allies. Together we are stronger."

The Political Risk: A Resurgent Far-Right

Ultimately, much of the anxiety in Europe is tied to Germany's domestic politics. The far-right Alternative for Germany (AfD) party is leading in some polls and could make major gains in upcoming local elections.

While populism is on the rise across the continent, the prospect of a nationalist party holding power in a remilitarized Germany is a unique concern for its neighbors.

"There is a growing worry about what could happen to this extremely strong German fighting power if the AfD were to take over political leadership," said Jana Puglierin of the European Council on Foreign Relations.

New York Federal Reserve President John Williams has signaled that the central bank is in no hurry to lower interest rates, stating that current monetary policy is effectively steering the economy toward its goals.

Speaking in New York on January 12, 2026, Williams emphasized that there is no immediate reason for a rate cut. His comments project confidence in the Fed's strategy to manage both employment and inflation.

Why the Fed is Holding Rates Steady

According to Williams, the central bank's current interest rate stance is specifically designed to achieve two primary objectives: stabilizing the labor market and bringing inflation back down to the 2% target.

"Monetary policy is well positioned to stabilize the labor market and return inflation to the 2% target," Williams noted, underscoring his belief that the existing policy framework is appropriate for the current economic climate. This position suggests the Fed sees its strategy as resilient enough to absorb potential shocks without needing immediate adjustments.

US Economic Strength Supports Current Policy

The Fed's patient approach is supported by strong underlying economic indicators. Current forecasts project that the U.S. Gross Domestic Product (GDP) will grow at a rate of 2.5% to 2.75% for 2026.

Furthermore, inflation trends are steadily aligning with the Federal Reserve's long-term targets. This combination of healthy growth and moderating inflation gives policymakers room to maintain a stable economic environment without rushing to alter interest rates.

Markets Show Confidence as Fed Stays Course

Financial markets reacted calmly to Williams' remarks, with equity markets showing little change. This stability indicates that investors have confidence in the Federal Reserve's plan and were not anticipating a shift in policy.

Overall, the outlook communicated by Williams is one of cautious optimism. The Fed's policy remains focused on sustaining economic growth while effectively managing any potential challenges on the horizon.