Oil Prices Ease as US–Iran Talks Temper Geopolitical Risk Premium

TrumpRx Launch Triggers Market Reaction

Japanese Drugmakers Lead Sector Declines

Pricing Power And Policy Risk

Investor Sentiment Turns Cautious

Source: The Japan Times

Following its January meeting, the Federal Reserve delivered an optimistic assessment of the U.S. economy, but the positive report creates a complex political landscape for former President Donald Trump. Fed Chair Jerome Powell's confident tone suggests the central bank sees little reason to implement the interest rate cuts that Trump has publicly demanded, setting the stage for a potential conflict between monetary policy and political objectives.

Powell Signals Economic Resilience

In his post-meeting press conference, Chair Powell outlined several indicators pointing to a surprisingly durable economy, a stabilizing labor market, and progress on inflation.

Key takeaways from his assessment include:

• Inflation: Disinflation is now visible in the services sector, although tariffs continue to keep goods inflation elevated. Crucially, long-term inflation expectations remain anchored within the Fed's preferred 2% target.

• Economic Activity: Powell noted that economic activity has been solid, with resilient consumers and continued business investment. He acknowledged, however, that the housing sector remains a notable weak spot.

• Labor Market: After a period of softening, data suggests the labor market is stabilizing. While job growth is slowing—partly due to slower workforce growth from lower immigration and participation—key metrics like job openings, layoffs, and wage growth have held steady.

Powell also acknowledged that the previous government shutdown likely had a temporary negative impact on the economy but expects a rebound in the current quarter.

The Political Dilemma: Why Good News is Bad for Trump

A strong economic report presents a direct challenge to Donald Trump, who has been a vocal proponent of the Fed lowering interest rates to stimulate the economy further. The central bank's dual mandate requires it to pursue stable prices and maximum employment. With inflation still running at 3% in January and the labor market showing signs of stability, the justification for rate cuts weakens considerably.

Figure 1: Former President Donald Trump has publicly advocated for the Federal Reserve to lower interest rates, creating tension with the central bank's policy outlook.

If the Fed were to cut rates now, it would risk over-stimulating demand and reigniting inflationary pressures. As long as consumers remain resilient and employment holds up, the Fed has a strong case for maintaining its current policy stance. While Trump's criticism of the Fed is prominent, he is not the first president to pressure the central bank on interest rate policy.

Voter Concerns and the Affordability Crisis

The debate over interest rates is unfolding against a backdrop of widespread economic anxiety among voters. Many Americans are grappling with an affordability crisis, as the surge in inflation since the pandemic has driven up the cost of living.

Housing costs, in particular, now consume a much larger share of income. For many, even rising salaries have not been enough to cover daily expenses while also saving for retirement or a home purchase. With midterm elections scheduled for later this year, the economy is a top issue for voters. Trump and the Republican party are keen to maintain their congressional majority to advance their agenda, making interest rates and affordability central political concerns.

Market Expectations vs. Fed Reality

Despite the Fed's steady message, financial markets are still pricing in two interest rate cuts this year. However, if incoming data continues to confirm a stable labor market and ongoing disinflation, the central bank will have little incentive to act.

A decision to hold off on cuts could negatively impact the stock market, creating another political headache for Trump. At the same time, the economic outlook can change rapidly. Monthly inflation and labor reports have been difficult to predict, meaning the potential for more rate cuts than expected—or none at all—remains a key uncertainty for investors to monitor.

From Political Tailwind To Market Gravity

ETFs Open The Door But Not The Safety Net

Confidence Breaks As Flows Reverse

Institutional Exposure Amplifies The Damage

History Reasserts Itself

Source: Bloomberg

The recent rally in oil prices has hit a wall, with crude posting its first decline in three days. A combination of factors is weighing on the market, including the potential selection of a more dovish Federal Reserve chair, cooling rhetoric between the U.S. and Iran, a routine OPEC+ meeting, and a reduction in U.S. tariffs on India.

However, the most significant catalyst was Iran's announcement that it will hold direct talks with the United States, easing market fears of an imminent military confrontation.

Geopolitical Thaw Pushes Crude Prices Lower

Iranian Foreign Minister Abbas Araghchi confirmed that negotiations with the U.S. are scheduled for Friday in Oman. The news immediately sent oil prices down, as traders priced out some of the geopolitical risk premium.

At 11:50 a.m. ET, Brent crude for March delivery fell 2.9% to $67.54 per barrel. The corresponding West Texas Intermediate (WTI) contract declined 3.0% to $63.19 per barrel.

Prices had spiked last week after U.S. President Donald Trump threatened force against Iran following a crackdown on nationwide protests that resulted in thousands of deaths. Despite the planned talks, a U.S. official told the AP that the White House remains "very skeptical" about a positive outcome. Trump also issued a warning that Iran's Supreme Leader Ayatollah Ali Khamenei "should be very worried."

OPEC+ Holds Cuts as US Inventories Plunge

On the supply side, the OPEC+ alliance met on February 1 and agreed to maintain its current voluntary production cuts through March 2026. The decision means the planned, gradual return of 1.65 million barrels per day (bpd) to the market will remain paused for the first quarter of 2026, citing expectations of weaker seasonal demand. The group reiterated that it retains "full flexibility" to adjust output based on market conditions.

Member countries also reaffirmed their commitment to compensating for any overproduction since January 2024. This is achieved through "make-up" cuts monitored by the Joint Ministerial Monitoring Committee (JMMC).

Key overproducers—including Iraq, Russia, and Kazakhstan—have submitted detailed schedules to offset a cumulative 4.779 million bpd of excess production from 2024 through early 2025. Kazakhstan is set to make the largest adjustment, cutting nearly 670,000 bpd by June. However, full implementation remains uncertain, as both Kazakhstan and Iraq have historically struggled to meet compensation targets.

Meanwhile, in the United States, the American Petroleum Institute (API) reported a massive draw in crude inventories. For the week ending February 4, stockpiles fell by 11.1 million barrels to 420.3 million barrels, dramatically exceeding market expectations of a 640,000-barrel draw. The decline was largely attributed to severe winter storm "Fern," which disrupted energy infrastructure and caused production freeze-offs, especially in the Permian Basin. Distillate fuel stocks also dropped by 4.8 million barrels, while gasoline inventories rose by 4.7 million barrels.

Analysts See Market Tightening in Late 2026

Despite the recent price drop, commodity analysts at Standard Chartered report that market sentiment is gradually turning more positive for the second half of 2026. The bank suggests that the bearish oversupply narrative that dominated late 2025 is fading.

This shift is driven by changes beneath the market's surface. The Brent forward curve has strengthened significantly, with backwardation now extending toward early 2027. This signals that traders are reassessing the depth and duration of the previously feared oversupply.

Standard Chartered also notes that:

• Many large projected supply surpluses from last year are likely to be revised toward more typical seasonal balances.

• Demand expectations for 2026 are already being adjusted higher, partly due to fiscal stimulus in China.

• Speculative long positions in crude are not overstretched, leaving room for more buying.

• U.S. shale growth is slowing in response to lower prices, making supply more price-sensitive.

Based on this, the analysts expect OPEC+ to restart incremental production increases in the second quarter of 2026. They argue this will happen not because the market is loose, but because tighter fundamentals will allow it to absorb the extra barrels, ultimately exposing how concentrated global spare capacity has become.

Natural Gas Prices Halve on Mild Weather Forecasts

In the natural gas market, U.S. prices have pulled back sharply. After recently trading above $7/MMBtu, Henry Hub prices have been cut in half to $3.48/MMBtu. This move was driven by forecasts of milder weather, which reduces heating demand and eases supply concerns.

The EIA forecasts that Henry Hub prices will average just under $3.50/MMBtu in 2026, while European TTF gas prices are expected to stabilize around €30/MWh. Over the long term, however, gas prices are projected to trend upward, fueled by explosive demand growth from AI-driven data centers, even as demand in Europe is expected to weaken due to electrification and renewable energy adoption.

Mexican officials are navigating a diplomatic minefield, exploring ways to send essential fuel to Cuba without triggering punishing tariffs from the United States. According to four sources familiar with the discussions, high-level talks are underway to find a solution that balances humanitarian support with economic reality.

The core of the issue is an executive order from U.S. President Donald Trump threatening tariffs against any country supplying fuel to the island nation. Mexican officials have been in frequent contact with their U.S. counterparts to understand the full scope of this threat and determine if any exemptions for aid are possible.

High-Stakes Talks Over Cuban Fuel Shipments

The outcome of these negotiations remains uncertain. When asked about the situation, the White House pointed to earlier remarks from President Trump, who told reporters on Monday he believed Mexico would cease oil shipments to Cuba, though he did not specify why.

The Mexican presidency and the U.S. State Department did not immediately provide comments, while Mexico's Foreign Ministry stated it had no information on the matter.

"There are talks happening almost every other day," said one source, who spoke on the condition of anonymity. "Mexico doesn't want tariffs imposed, but it is also firm in its policy of helping the Cuban people."

Three of the sources indicated that the talks are progressing, expressing hope that a resolution can be found. If an agreement is reached, two sources noted that Mexico could dispatch a tanker with gasoline, food, and other supplies classified as humanitarian aid within days.

Cuba's Deepening Energy Crisis

The need for fuel in Cuba is critical. The country imports two-thirds of its energy and is currently facing severe power outages and long lines at gas stations.

The crisis intensified after a U.S. blockade of Venezuelan tankers in December, followed by the capture of President Nicolas Maduro in early January, which halted oil shipments from Venezuela. This left Mexico as Cuba's largest supplier, but that relief was short-lived.

In mid-January, the Mexican government stopped its own shipments of crude and refined products following pressure from the Trump administration. Washington then issued its tariff threat, justifying it by claiming Cuba poses an "extraordinary threat" to U.S. national security—a charge Havana denies.

In response to the shortages, the Cuban government announced on Thursday that it was developing a plan to address "acute fuel shortages," with more details expected next week.

Humanitarian Concerns and Political Pressures

The situation has drawn international attention. U.N. Secretary-General António Guterres warned this week that Cuba could face a humanitarian "collapse" if its energy needs are not met.

Domestically, Mexican President Claudia Sheinbaum is facing pressure from her own coalition. The ruling Morena party has long-standing ideological and historical ties to Cuba, and there is a strong desire within the party not to abandon Havana in its time of need.

Sheinbaum herself highlighted the potential human cost of the U.S. policy. "Imposing tariffs on countries that supply oil to Cuba could trigger a far-reaching humanitarian crisis, directly affecting hospitals, food, and other basic services for the Cuban people," she stated last Friday. "A situation that must be avoided through respect for international law and dialogue."

The United States and Argentina have finalized a new trade and investment agreement that gives preferential market access to American goods, establishes rules for digital trade, and deepens cooperation on critical economic and security issues.

The deal, signed by U.S. Trade Representative Jamieson Greer and Argentine Foreign Minister Pablo Quirno, builds on a framework first established on November 13. According to the U.S. Trade Representative's office, the agreement is set to significantly reduce or eliminate tariffs on a wide range of U.S. products.

US Exports Gain Broad Market Access

Under the terms of the agreement, Argentina will lower trade barriers for numerous American industries. The tariff cuts will apply to a diverse list of U.S. goods, including:

• Medicines and medical devices

• Chemicals and machinery

• Motor vehicles

• Information technology products

• A wide range of agricultural products

In a key move, Argentina has also agreed to accept U.S. safety and regulatory standards for imported goods like automobiles and medical devices. This alignment extends to food safety, with Argentina committing to recognize U.S. Department of Agriculture standards for meat and poultry.

A Breakthrough for American Agriculture

The agreement delivers several specific wins for the U.S. agricultural sector. Within a year, Argentina will open its market to American poultry and poultry products. It will also work to simplify bureaucratic processes for U.S. exporters of beef and pork.

Furthermore, Argentina has committed not to restrict U.S. exporters' use of certain cheese names, such as "asiago," "feta," or "camembert." This addresses a long-standing issue where the European Union seeks to label these as geographic indications exclusive to its own regions.

Digital Trade and Strategic Cooperation

The pact also addresses modern economic challenges. Argentina has pledged not to impose customs duties on cross-border data transmissions or implement a digital services tax aimed at U.S. technology companies.

On the security front, the agreement calls for closer cooperation on enforcing export controls for sensitive dual-use items that could have military applications. The two nations will also work together to ensure the integrity of Argentina's telecommunications infrastructure. While not naming China directly, the U.S. Trade Representative's office stated the deal would enhance cooperation in fighting the unfair trade practices of third countries.

Focus on Critical Minerals

A major component of the deal involves strategic resources. Argentina has committed to facilitating investment by U.S. companies in its critical mineral projects, including copper and lithium. The country will also prioritize the United States as a trading partner for these minerals over "market manipulating economies or enterprises," another implicit reference to China.

Political Context and Reactions

This trade agreement deepens the economic partnership between the administrations of U.S. President Donald Trump and Argentine President Javier Milei. The deal follows a $20 billion currency swap line launched by the U.S. Treasury in October to help stabilize the peso. At the time, President Trump hailed Milei's party's election victory as a key step in Argentina's economic recovery.

"The deepening partnership between President Trump and President Milei serves as a model of how countries in the Americas... can advance our shared ambitions and safeguard our economic and national security," Greer said in a statement.

Quirno echoed this sentiment in a social media message, calling the agreement a "great achievement" for both nations.

However, the financial support underpinning this relationship faces some scrutiny. Earlier on Thursday, U.S. Senator Elizabeth Warren, the top Democrat on the Senate Banking Committee, called on Treasury Secretary Scott Bessent to end the $20 billion currency swap, arguing it was intended as a temporary measure.