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 - High
RED: Severe (+/- 4%) ORANGE: High (+/- 2%) YELLOW: Elevated (+/- 1%) BLUE: Guarded (+/- ½%)
THE BOOSTER SHOT
- John Bolton 2017 memo on Iran is reminiscent of the case for war with Iraq
- While the US seeks energy dominance, it is OPEC that influences the price of oil
- Iranian oil exports are down about 13 percent so far this month
The market was swayed last week by the notion that Saudi Arabia, the de facto leader of OPEC, was comfortable with oil priced near $80 per barrel. With few producers on hand with actual barrels to put on the market in short order, $80 per barrel may soon emerge as the new floor price as we get closer to the November deadline for U.S. sanctions on Iran.
Market tensions, meanwhile, mirrored geopolitical tensions as a resistance movement seeking autonomy in southwestern Iran took credit for a brazen attack during an Iranian military parade. Iran is backed into a corner, both in economic and security terms. With OPEC's third-largest producer facing isolation, it may be only a matter of time before that security becomes a global concern. Fear breads uncertainty, a foundation for volatility. Last week saw the price of oil breach $80 momentarily, though we were spot on last week with our Yellow alert as the price for Brent crude oil gained 0.91 percent to close trading Friday at $78.80 per barrel.
President Trump last week complained to OPEC that prices were too high, linking markets issues to national security commitments.
"We protect the countries of the Middle East," he said. "They would not be safe for very long without us, and yet they continue to push for higher and higher oil prices! We will remember."
Ties between US national security and oil from Middle East producers reach back at least a generation. President Jimmy Carter in 1980 said military force was an option to protect the "vital interests" of the United States in the Persian Gulf. Nine years later, President George H. W. Bush issued National Security Directive 26, stating "access to Persian Gulf oil and the security of key friendly states in the area are vital to US national security."
But "for the first time in generations," the Trump administration states the United States can be an energy dominant nation, one that establishes itself "as a leading producer." This ambition, however, does not extend to market influence. Shale oil alone cannot influence the price of oil. And at weekend meetings in Algiers, parties to the OPEC-led agreement to control collective production let it be known they are in charge of that end. Though supply-side issues are a growing concern, a joint committee monitoring compliance with the agreement expressed satisfaction with the current market scenario, noting the balance between supply and demand was "healthy."
Markets at times move on factors apart from fundamentals. Saudi Arabia has said it could fill part of the market gap from Iran, but only for about six months. ClipperData figures show Iranian crude oil exports so far this month are around 1.5 million barrels per day, down about 30 percent from the average over the six-month period ending in July.
Speaking Saturday, Iranian President Hassan Rouhani recognized the economic difficulties ahead, but remained defiant in the face of mounting US pressure in the region. Saying President Trump would suffer the same fate as Saddam Hussein during the eight-year war in the 1980s, Rouhani said that, like Saddam, it was the United States that was the regional aggressor. While Iran stands by its international commitments, he said, the Trump administration has taken a unilateral step toward prodding the Islamic republic into action.
"You are saying that we must not be present in our own region, but the question is that what are YOU doing in this region from thousands of kilometers away?" Rouhani added.
Regional tensions are sure to be highlighted when Trump takes the podium this week at the UN General Assembly. The new US president last year placed his emphasis on sovereignty, noting that nations in a self-help arena should serve their own interests first. The line this year from Trump will remain the same. "America First" is a selfish unilateralism aligned with the realist doctrine of international relations theory. In this world view, states are not so much obliged to the welfare of their citizens or the international community.
Instead, the state is only concerned with what that welfare contributes to its own benefit. Just as a business is concerned only with profit, a state is primarily concerned with its own survival and status of power. This bias of self-interest invokes a preoccupation with self worth, though that worth will be questioned by a collective United Nations wary of US ambitions for zero-sum victories.
States assess their status of power in relative terms. If that assessment leads to perceptions of inadequacy, resentment toward others will grow. This in turn can lead to perceptions of more and more adversarial behavior, leaving a paranoid or fearful nation tempted to strike first. The Trump administration's tactic on Iran is to label it a bad actor covered by a bad nuclear agreement, harass it with sanctions and threats, and then vindicate itself when Iran behaves badly by striking a defensive posture. This weekend's attack on the revered Islamic Revolutionary Guards Corps might trigger such a defensive posture from Iran. Will it be met with an offensive response?
The week of the start of the US invasion of Iraq in March 2003 triggered a 15 percent swing in the price of Brent crude oil. As US Under Secretary of Defense for Policy Paul Wolfowitz, then U.S. Secretary of Defense Dick Cheney and others made the case for war against Iraq in the late 1990s, we can see parallels for war with Iran in a 2017 memo from John Bolton advocating the expedited "delivery of bunker-buster bombs" and support for an "internal resistance in Iran." With Brent testing the $80 per barrel mark already on Monday, we're issuing an Orange alert for the week, anticipating a price movement of plus or minus 2 percent.We'll need to pay close attention to the theatrics this week at the UN General Assembly to gauge the threat barometer for geopolitical affairs. Underneath the political rhetoric, we're keeping an eye on Tuesday's gauge of US consumer confidence. On Wednesday, US Federal Reserve Chairman Jerome Powell explains the Federal Open Market Committee's decision. Thursday brings the next indication of US gross domestic product and the week closes out with data on US personal spending.