Welcome to The Geopolitical Energy and Risk Monitoring Report (GERM) by Dan Graeber, a commentary on the intersection between geopolitical events and the price of oil. 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
- Change in the Western order is complete.
- IEA sees geopolitics as a looming market factor.
- The bears still hold the advantage.
Crude oil prices continue to show strength, gaining momentum from the shortage of heavy oil on the market and steady OPEC constraint. Discipline from OPEC+ has overshadowed US oil production levels, though shale took a hit last week on a lower rig count. Nevertheless, shale is king, according to today’s outlook from the IEA. Meanwhile, there are ever-present concerns about an economic slowdown. Politically speaking, what were once anomalies in the West are becoming normal, signaling the jarring impact of change is over. But in parts of the Middle East, the strains of evolution may only be just beginning.
The bears still hold the advantage, though crude oil prices took it on the chin Friday on European economic concerns. Brent crude oil closed Friday at $65.74 per barrel, only slightly higher than the end-of-session price for March 4.
The idea of a European Union evolved from the US-led reconstruction effort after World War II. By the early 1970s, the last of the European dictatorships ended with the Carnation Revolution in Portugal. By then, the European community counted nine of its members when Denmark, Ireland and the United Kingdom joined. In the 1980s, the Berlin Wall, the last symbol of a divided continent, came down. The next generation of the European order saw the community tighten.
The United States, meanwhile, saw its hegemony unmatched with the collapse of the Soviet Union. While tested by the Vietnam War and the burdens of leadership in an interdependent world, the United States endured through the Cold War to enjoy a unipolar moment. Writing in 1990, Charles Krauthammer observed that “the center of world power is the unchallenged superpower, the United States, attended by its Western allies.” That structure – one of a predominantly Western order – should have been the end of history. The neo-Marxist thinker Antonio Gramsci coined the term “state spirit” to describe the organic momentum of the status quo.
“State spirit presupposes continuity, either with the past, or with tradition, or with the future; that is, it presupposed that every act is a moment in a complex process, which has already begun and which will continue,” he wrote in The Modern Prince.
This “materially unknown” force should have carried the momentum of the Western order forward, but it could only continue so far. Now, a different type of force is present – nationalism. Once the balancer of European power, Great Britain is leaving the continental community behind. In the United States, President Trump has sought to unshackle the restrictions on autonomy imposed by the liberal world order. What he’s done instead, however, is drive the United States toward isolation. What was once unthinkable in the modern era – a fractured European community and fading US hegemony - is becoming normal. That signals systemic change in the West is complete.
Change is underway, however, in the Middle East. Muammar Gadhafi is gone. Saddam Hussein is gone. A generation or so after the last authoritarian regime collapsed in Portugal, the 20-year-reign of one of the region’s remaining strongmen, Algerian President Abdelaziz Bouteflika, is under threat. His decision to seek a fifth term has sparked the largest nation-wide protests in more than 20 years. Elsewhere, Iranian President Hassan Rouhani arrived Monday in Baghdad in an effort to solidify ties in the post-Saddam Iraq.
Instead of cozying up to Washington, Baghdad may be tilting toward a Shiite neighbor that has been the target of hawks in the Trump administration. Iran may be backed into a corner, but it’s a regional corner where Washington is no longer the heavyweight it once was. Regime change and shifting alliances in the Middle East, like the transformations in the West, were also unthinkable. Now friends, Iran and Iraq were bloody rivals only 30 some odd years ago. If Middle East momentum runs a generation behind the Western order, a new normal may be just over the horizon.
On Friday, European Central Bank President Mario Draghi said economic growth was threatened by geopolitical factors and protectionism. On Monday, US Federal Reserve Chair Jerome Powell offers his version of the economic landscape. On Tuesday, the cost of living in the United States will be gauged by February changes in the Consumer Price Index. Wednesday brings a snapshot of January construction spending in the world’s leading economy. On Thursday, OPEC releases its latest monthly market report. Here, look for sentiments on both the global supply of oil and the global economy. The IEA has already said the economy is slowing down, but stock indices mask some of the signs. The IEA returns again on Friday with its monthly report. The IEA and OPEC reports alone should signal a volatile week ahead. An Orange alert is in place for the week.