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
- The old international patterns are crumbling.
- Balanced systems are stable systems. The current system is out of whack.
- Confusion is a four-letter word for diplomacy.
OPEC leaders ignored the force of US President Donald Trump by pledging to cut more than 1 million barrels per day in production. Trump may be facing a crisis of legitimacy given the ongoing pressure from the Mueller investigation and questions over his penchant for hyperbole. In the Arab community, meanwhile, Qatar’s decision to leave the evolving list of OPEC members is indicative of systemic change in the international order. Henry Kissinger more than a generation ago said that old patterns of the international system were starting to change. The new patterns of the 21st century may be unsettling.
A whipsaw week across equities was tense enough. Even with a 3.2 percent loss extended over trading on Tuesday and Wednesday, the price for Brent crude oil still shot up 5 percent for the week. The global benchmark for the price of oil ended trading on Friday at $61.67 per barrel.
In the wake of the Watergate scandal, Kissinger in 1975 noted that nonpartisan cooperation in Washington was necessary so that foreign policy could be conducted through a united US front.
“Foreign nations must deal with our government as an entity, not as a complex of divided institutions,” he said before the Los Angeles World Affairs Council.
A revolving door of US trade negotiators is disjointed enough. Trump last week sowed further confusion across the broader market with his rhetoric on Chinese trade relations. After the G20 summit in Buenos Aries, the president claimed a breakthrough in the trade war with China, sparking a rally on Wall Street. The Dow Jones Industrial Average, however, fell more than 800 points on Tuesday after the president dubbed himself “Tariff Man.” That highlighted the challenge of trying to match Trump as a man with Trump as policy. Confusion may be a strategic business tactic, but as Kissinger suggested, it does little to comfort potential US partners.
For OPEC managers, meanwhile, the road ahead may be difficult to navigate because of US shale resiliency to lower oil prices and Iran’s proficiency at cheating sanctions. Trump’s influence was cast aside in Vienna when OPEC members emerged with a commitment to trim 1.2 million barrels per day from the global market. Against the backdrop of an Iran limited by US sanctions pressure and Venezuela limited by its own malaise, a cut of that size is remarkable.
Internally, OPEC is facing its own questions of legitimacy. Qatar, one of the group’s most senior members, has decided to quit. The largest supplier of liquefied natural gas in the world, Qatar sees its own influence in OPEC waning because it is only a minor oil producer. Qatar’s frustration with multilateral collaboration suggests a transformation beyond OPEC membership is underway, with a boycott of a weekend meeting of the Gulf Cooperation Council as Exhibit A. Both the OPEC and GCC decisions may have been meant to embarrass Saudi Arabia in the wake of the Khashoggi killing, but it also indicates that, as Kissinger said, global patterns are changing.
Confusion works in a business setting because it keeps opponents off balance. But balance in the international system, be it through systemic means or through the constraints of multilateralism, is synonymous with stability. A system out of balance is a system that’s unstable. Instability breeds confusion, which leads to market volatility. This, importantly, is not solely an American issue. British Prime Minister Theresa May has steered a Brexit strategy that’s been the posterchild for volatility, to say the very least. Qatar’s regional opposition, meanwhile, could threaten Gulf stability and destabilize a region with rich shipping lanes that are vital to the world’s economy. Should one domino fall, as the Nixon administration noted, the entire system could collapse.
“Now we are entering a new era,” Kissinger said. “Old international patterns are crumbling.”
The new international pattern looks increasingly bifurcated.
Brent crude oil prices could continue to rally, especially given weekend warnings about output from Libya’s giant El Sharara oil field. With French rallies growing in severity, questions over the British post-Brexit economy and Italian budget issues, a release Tuesday from the Center for European Economic Research on euro sentiment will be an important regional gauge to watch. Low energy prices, a cooling housing market and equities pressure makes Wednesday’s number on US consumer confidence something to monitor. The focus shifts back to the eurozone on Thursday with a rate decision from the ECB. And it’s back to the United States again to end the week with November retail sales figures. With weekend revelations on the Russian investigation, Chinese trade concerns, doubts over Brexit and Middle East fracturing, expect another week of volatility ahead. With a nod to the British crown, an Orange alert is in place, with crude oil prices expected to move by plus or minus 2 percent on the week.