Welcome to The GERM Report by Dan Graeber, a commentary on the intersection between geopolitical events and the price of oil. GERM stands for Geopolitical Energy and Risk Monitoring. Our indicator is based on the expected price volatility by the end of the current trading week.
Risk level: Orange
RED: Severe (+/- 4%) ORANGE: High (+/- 2%) YELLOW: Elevated (+/- 1%) BLUE: Guarded (+/- ½%)
THE BOOSTER SHOT
- The status quo is under threat.
- A US Fed decision this week could be make-or-break.
- Populism stings.
A lack of clarity over the future of unity in the global centers of power was mirrored in the markets last week. In the United States, every aspect of the president’s life is under some form of legal cloud. In Europe, unity is under threat from London and populist revolts in Paris. For the markets, OPEC economists said future momentum is under threat from trade tensions, geopolitical issues and monetary tightening. Late cycle trends, meanwhile, are threatened by a US Fed unwilling to accept yield-inversion signals and the general uncertainty from a fractured world order.
Despite indications of supply-side pressures, the price for Brent crude oil cooled further last week amid economic concerns. Brent lost 2.25 percent last week to close Friday at $60.28 per barrel.
White House political chaos played out live on national television as the president met with incoming Democratic leaders to discuss a looming government shutdown. Dogged by investigations into his business, private and political lives, US President Donald Trump is losing his cool and it shows. Meanwhile, the revolving Cabinet door continues to spin as a search for a new chief of staff brought in only an interim answer and Interior Secretary Ryan Zinke resigned amid ethics probes.
In Europe, British Prime Minister Theresa May survived a political test, but the road out of the European Union will be anything but smooth. Meanwhile, French President Emmanuel Macron continues to face the sting of populist revolt from the Yellow Jackets. With chaos filling the vacuum of unity in the world’s power centers, systemic change in the international arena is imminent.
Worn out by decades of management, the United States has traded in the reins of hegemony for a return to a healing isolation. The word hegemony derives from the Greek word hēgemonia, which translates loosely to “leading the way.” A power cannot effectively lead the way if its legitimacy is threatened by divisions at home and the distractions those divisions bring. The United Kingdom, once the balancer of European order, is moving in parallel to the United States as it steps away from its continental counterparts. Meanwhile, France, which had hegemonic ambitions in its own right under its Machiavellian raison d’etat, is under threat from the same populist revolts that ushered in American and British retreat. In the modern political age, there is no longer a Western power able or willing to lead the way.
Which brings us to Russia and China. As the appetite to uphold the Western status quo wanes, a new generation of consensus is rising. Russia has not been shy about making claims to power over the former Soviet satellites of Georgia, Poland and Ukraine. If we assume the energy sector is the chessboard of international gamesmanship, Russia put a check on Western power with its LNG terminal at Kaliningrad, an enclave on the border of the former Soviet Union.
That helps solidify the Russian grip on the regional energy sector, even as the United States tries its hand at LNG diplomacy. Russia’s seat at the OPEC table, meanwhile, only strengthens its hand, as evidenced by the group’s decision to cut against Trump’s pleas. China, for its part, may be simply waiting for the Western order to collapse and manage the incoming Beijing Consensus by default.
If economic cycles mirror the waxing and waning of global powers, those with the ability and willingness to assert themselves may be upsetting the Western order. There are obvious signs of economic distress on the horizon and that distress only strengthens the blow to interdependence that populism strikes.
A quiet start to the week is a setup to what may set the tone for 2019. Most of the action comes Wednesday when the European Commission publishes no-deal Brexit documents. That comes on the same day as US Fed Chair Jerome Powell explains his next rate decision. The Fed cycle might have to pause amid economic pressures, though rates may already be so low that they cripple market managers ability to fight in the future. How the Fed reacts could be the market maker this week. On Thursday, it’s Great Britain’s turn to decide on lending rates. Friday brings a flood of numbers, from Canadian GDP to US personal spending. It may be the holiday season, but this week will be anything but boring. Expect swings in the Orange level this week.