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The Geopolitical Energy and Risk Monitoring report

May 13, 2019 8:42:33 AM EST
By: Dan Graeber

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

  • Brent on the rise after alleged vessel attacks in the Persian Gulf.
  • There will be collateral damage in the trade war.
  • Uncertain geopolitical times create volatile market conditions.

The influence of US foreign policy is diluted across multiple fronts. War in a trade sense is on, and the US president’s top economic adviser said there will be casualties on both sides. In military terms, the United States seems to be goading Iran into conflict. That US force is near-hegemonic is not disputable as there are few nations with the capacity to rival the American military. US influence, however, is another matter. In global terms, many of the major powers, notably in Europe, are struggling to keep the web of interconnectivity in place so that the promise of democratic peace can be realized. But that ideal is losing appeal for state entities adopting a more selfish tone. In any event, the system is changing. Forced unexpectedly to search for new foreign policy roles, a state feels threatened by uncertainty and is vulnerable to overreaction or mistakes. In the market, that means volatility.

President Trump last week made mistakes in his broadcasts about the outcomes of heavy tariffs on Chinese goods. Tariffs, despite the president’s messaging, are paid by the imposing power, not the target. That misinformation campaign rattled the market as the pain will be felt by two of the world’s leading economies. The negative aspect of trade wars balanced lingering supply-side concerns and talk of war in the Middle East. In the end, the price of oil barely moved. Brent closed the week at $70.62 per barrel, a change of only 0.04 percent from the start of trading May 6.

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President Trump on Friday more than doubled tariffs on thousands of Chinese goods, claiming in a barrage of tweets that American businesses and American consumers would reap the benefits. His top economic advisor, Larry Kudlow, told Fox News Sunday that “both sides” would indeed feel the consequences of the trade war. According to a study cited by Fox News, if the president goes all in on tariffs, the average family of four would have to shell out another $2,300 per year. Ironically, that could work in the president’s favor to some extent in that it was the average blue-collar worker, frustrated that the liberal world order did not pan out as promised, that brought Trump to power. Even if the US economy declines deep in the election cycle, a president that built his fortunes on strategic messaging may be able to spin the narrative just enough to make it seem like it is the rest of the world that’s not playing fair with the United States, rather than the other way around.

Meanwhile, the United States seems to be goading Iran into war by placing B-52 bombers, strike groups and other military assets in the Persian Gulf. News of alleged attacks on Saudi tankers carrying oil to the United States is reminiscent of the narrative spun by Washington in the run up to the Iraq war. Boiled down, Trump’s national security team is convinced Iran is a bad actor, so they leave a multilateral agreement designed to moderate Tehran’s behavior. Then, the national security team bullies Iran to the point that Tehran has no choice but to react and the Trump team can then say, see, we told you they were bad actors, and make the case for military conflict. Speaking Sunday, Maj. Gen. Hossein Salami, the commander of the Islamic Revolutionary Guard Corps, said hard US power in the Persian Gulf was more psychological than military warfare, but added that the United States “lacks power and does not dare to start a war against Iran.”

Hard power is the use of military or economic force to coerce others to follow a particular course of action. It is a “do this or else” strategy. In the case of the US-Chinese trade war, however, the strategy may cause severe collateral damage that will have world-wide consequences. Because they are the two leading economic powers, the entire global market will suffer blowback. In military matters, the US effort to display power may be a sign of the times. Henry Kissinger in his seminal book Diplomacy notes that the new world order will be characterized by statesmen that not only lack the characteristics needed to govern, but lack the capacity to manage the international order. As the system changes, states find themselves in new and unexpected roles.

As a nation gains in power relative to others, its capacity to exercise leadership grows. As it falls behind, the capacity to lead, as well as the willingness to lead, usually wanes. Forced into a new foreign policy role, a state in a changing system feels threatened by uncertainty and is vulnerable to overreaction. Even more striking is the observation from neo-realist thinker Kenneth Waltz on force, be it military or economic. “Force is least visible where power is most full and most adequately present – Power maintains order; the use of force signals its breakdown.” Force, not power, is the prevalent theme in the international system today. Power and economic strength are interconnected. Order may be breaking down, and the economy may suffer as a result.

First and foremost, it is a trifecta week, with the EIA, IEA and OPEC all on tap to issue assessments of the state of affairs of oil and the economy. Elsewhere, watch for US data on Monday on mortgage foreclosures and delinquencies. We get a reading of economic sentiment for the eurozone on Tuesday. Wednesday brings GDP readings for the European and German economies. The week ends Friday with the University of Michigan’s gauge of economic sentiment. The forward curve for Brent is still in backwardation, with December prices now about $3 per barrel lower than the spot price. The $70 per barrel level established itself clearly as the support in trading last week. Resistance seems to be somewhere around $73 per barrel, though the market is set up to get increasingly tighter ahead of summer. The current price for oil could start to look like bargain, and with OPEC et al. on tap this week, an Orange alert is in place, with Brent expected to move by about plus or minus 2 percent.

About the Author

Dan Graeber

is Chief Editor at ClipperData. He specializes in exploring the intersection between geopolitical events and the price of oil.

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