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: Yellow
RED: Severe (+/- 4%) ORANGE: High (+/- 2%) YELLOW: Elevated (+/- 1%) BLUE: Guarded (+/- ½%)
THE BOOSTER SHOT
- NOPEC legislation may backfire on US shale producers.
- Oil prices have been too low to support growth in Houston.
- Saudi Arabia is delivering crude oil for Venezuela.
Concerns about Venezuela dominated the headlines last week as market watchers focused on barrel diversions outside the Western Hemisphere. Beneath the din, lawmakers in Washington quietly passed legislation that would expose OPEC members to anti-trust laws in the United States. The measure, the No Oil Producing and Exporting Cartels Act of 2019, or NOPEC, would make it illegal to restrain production of any petroleum product if that action influenced market prices in the United States.
Now in its third year, OPEC is already doing just that, however. OPEC measures in place since 2016 helped pull the price of oil from historic lows of around $25 per barrel to a three-year average of around $56 per barrel for Brent. OPEC’s efforts helped revive the US shale industry, though President Trump has been consistent with his pressure on the oil producing group. What’s spared from the NOPEC legislation, interestingly, is Russia.
Supply-side concerns from three OPEC members – Iran, Libya and Venezuela – were offset by steady inventory gains in the United States last week. The price for Brent crude oil closed trading on Friday at $62.10 per barrel, down 1.04 percent on the week.
Tabled more than once in various iterations, US lawmakers last week finally agreed on the text of a bill that would expose OPEC members to anti-trust violations. NOPEC legislation amends the Sherman Act of 1890, which hobbled industry giants like J.P. Morgan and John D. Rockefeller. Introduced in the Senate by a bipartisan group from the Judiciary Committee, including presidential hopeful Sen. Amy Klobuchar, D-Minn., the measure seeks to control price fixing by OPEC.
“We’re also committed to reducing our reliance on foreign oil, especially when it’s artificially and illegally priced,” committee member Sen. Chuck Grassley, R-Iowa, said in a statement. “Our bill shows the OPEC members we will not tolerate their flagrant anti-trust violations.”
Speaking in December, OPEC Secretary General Mohammad Barkindo expressed the stated purpose of production limits was to ensure market stability. Stability “begets prosperity,” he said, which has a spillover effect for global industries and the global economy. With US production continually breaking records, and inventories swelling toward the glut side, OPEC constraints have yet to lead to huge spikes in the price of oil or at the gasoline pump, a main concern for NOPEC backers.
Instead, it has been mostly US policy, such as limiting the flow of Iranian oil or sanctioning Venezuela, that has been a main source of volatility. In late January, the Federal Reserve Bank of Dallas said the price of oil was still too low to support growth. According to economists at the Dallas Fed, the economy in Houston will move from above-average growth to below-average growth this year.
Saudi Arabia and Russia are the parties to the OPEC+ production deal doing most of the heavy lifting. Since it is a voluntary contributor, Russia would theoretically be shielded from NOPEC legislation. Already, Moscow has deftly maneuvered through the geopolitical landscape to remain a resilient and influential player. Though long-term ties have often been put on the table, Russian Energy Minister Alexander Novak said in December that a more permanent relationship with OPEC was questionable because of the additional layers of bureaucracy and further exposure to US sanctions on monopolies.
More recently, Novak has signaled that Russia is moving slower than its OPEC counterparts on trimming production. That means if Russia can skirt its obligations, it could act as a de facto US manipulator by keeping the market flooded enough to keep oil prices below the break-evens for shale, while at the same time enjoying a larger market share.
Venezuela, meanwhile, has become the latest geopolitical playing ground pitting the West against the rest. Russia’s Gazprombank was allegedly told by PdVSA to accept deposits for its oil sales. Highlighted last week, Russia and China, two of Nicolas Maduro’s two main benefactors, are employing balancing behavior against the United States in Latin America and elsewhere. Now, Saudi Arabia may be circling too in Caracas.
On Sunday, Saudi Arabian national shipping company said one of its vessels, Abqaiq, was on its way to Venezuela to pick up a cargo of oil for delivery to India. Before Abqaiq was shown to be empty, US Sen. Marco Rubio, R-Fla., accused Saudi Arabia of violating US interests by delivering diluent, needed to facilitate the movement of heavy crudes, to Venezuela. Saudi Arabia, despite strong military ties with the United States, is already sending fewer barrels to the United States. US President Trump’s isolationist policies may not be making America as great as he anticipated.
This week is a trifecta week, with the EIA, IEA and OPEC all issuing their monthly reports. Expect comments on the state of the global economy and supply data to drive the narrative on those reports this week. On Monday, the British government releases data on fourth quarter GDP, which may be a telling indicator as the country prepares for its choppy exit from the European Union. BOE Governor Carney speaks Tuesday in London. Wednesday brings a glimpse of US consumer prices for January, which may be interesting given recent sentiment from top US federal banking chiefs. Japan also publishes fourth quarter GDP figures on Wednesday. On Thursday, it is Europe’s turn with fourth quarter GPD, an indicator that could add to looming concerns about a slowdown. And finally, Friday brings the ever-telling gauge of US consumer confidence from the University of Michigan. Economic and supply-side concerns may be baked into the market at this point in the game, so a Yellow alert is warranted, with crude oil prices expected to move by around plus or minus 1 percent.