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
- Russia is testing the Monroe Doctrine.
- The stance on oil prices is similar in Washington and Moscow.
- Democratization is an incredibly violent process.
Crude oil prices are on pace to notch their best quarter in a decade on the back of US sanctions pressure on Iran and political uncertainty in Venezuela. Markets were volatile last week, pulled lower by a miss on US GDP and a build in US inventory levels. While Iran in the four decades since the inception of the Islamic republic has grown accustomed to US pressures, an overt effort at regime change in Venezuela is a relatively new challenge for Caracas. Crippling blackouts and dwindling oil exports suggest Venezuela might start looking more like a failed state. The fight over authority in Caracas is pitting the two former Cold War opponents against each other in a battle for influence in the Western Hemisphere. For Washington, the departure of Nicolas Maduro is the solution to the crisis. For the Kremlin, it’s US meddling that’s to blame. Regime change is messy and the recovery process is long. In the battle of the Western Hemisphere, it’s not so much Caracas that matters, but which of the two Cold War foes has more to lose.
Crude oil prices bounced around for most of last week in a whirlwind of economic data. Recessionary alarms are still ringing, however, and a sustained run for crude oil prices could make matters worse. The US Commerce Department revised its estimate of fourth quarter GDP lower by 0.4 percent to 2.2 percent, compared with the third quarter increase of 3.4 percent. In the end, however, it was tighter market conditions that pushed the price of oil up 2 percent for the week. The price for Brent crude oil closed Friday at $67.83.
“We strongly caution actors external to the Western Hemisphere against deploying military assets to Venezuela, or elsewhere in the hemisphere, with the intent of establishing or expanding military operations,” US National Security Advisor John Bolton said Friday. “We will consider such provocative actions as a direct threat to international peace and security in the region.”
Bolton in November included Venezuela in his “troika of tyranny” and, shortly after recognizing National Assembly President Juan Guaido as the interim head of state, Washington dusted off Elliot Abrams of Iran-Contra fame to serve as a special envoy on Venezuela. Those figures are defending the status quo in the Western Hemisphere with clarity not usually seen from the Trump administration. Bolton on Friday was reminding the world of US ambitions at regional hegemony. In 1823, the Monroe Doctrine articulated US control over the Western Hemisphere. The status quo was embraced more than a century later when President Roosevelt said the doctrine “was and is” aimed at deterring non-American influence in the region. But in 1962, US hegemony over the Americas was challenged by the placement of Soviet missiles some 90 miles off the coast of Florida. Today, threats to US leadership in the region are present in the form of Russian boots on Venezuelan ground.
Washington argues that elections that secured another term for Nicolas Maduro were illegitimate and the way out of the crisis is through democratization. A cornerstone of the theory that believes a stable system is one that’s comprised of interconnected actors is that advanced democracies do not wage war against each other. Former US President George W. Bush argued that it was Washington’s destiny to make the world safe for democracy. But democratization is an incredibly violent process. Countries transitioning to democracy are not strong republics and some nations trying the process, like Iraq and Libya, have little experience with democracy at all. States attempting democratization will be mired in civil war as the state system resembles more of a realist scenario with various units competing for power rather than the liberal scenario of cooperation. Russian Foreign Ministry spokeswoman Maria Zhakarova last week suggested it was Washington, not Moscow, that was the destabilizing force in Venezuela. Washington, she said, was “deliberately stoking chaos” and fomenting “the collapse of the state, which can result in no winners."
Russia and the United States have two things in common – both are fine with lower oil prices. Moscow relies heavily on oil and natural gas exports for revenue. In its latest statement, the Central Bank of Russia warned the economy was exposed to risks from geopolitical factors, but noted that fluctuations in the expected range for the price of oil did little to most other economic growth indicators. Russian GDP is expected to grow by about 1.5 percent this year and reach as high as 2.3 percent in 2021. The higher the price of oil, the better it is for Russia. The same cannot be said for the US economy, where discretionary spending and retail fuel prices go hand in hand. The United States is also entering an election cycle and high gas prices do not bode well for any incumbent. A tight oil market by US design could backfire, suggesting Washington has more to lose in the fight over Venezuela. Yet, even with oil prices charting their best quarter in a decade, the price for Brent is still far below the $86.07 per barrel peak in early October. Other producers are filling the Venezuelan gap and Citgo stations are still in service. That suggests there is nothing to fight for in Venezuela itself, but that Venezuela is symbolic of the fight over control in the Western Hemisphere.
April begins with a trove of data, from the eurozone consumer price index to the ISM Manufacturing Survey for the United States. On Tuesday, US durable goods orders for February will be a good indication of confidence in the world’s leading economy. The usual market data aside, things slow down from there. On Friday, it may be worth combing through the pages of information on US and Canadian employment to find data on oil and gas sector health. Brent could flirt with $70 barrel this week on momentum alone, so an Orange alert is in place as crude oil prices are expected to move by about plus or minus 2 percent.