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
- OPEC+ sticks to the script.
- Russia is among the few legacy powers not internally divided.
- Power is lost without a clarity of purpose.
Saudi Oil Minister Khalid al-Falih on Sunday acknowledged recent volatility in the price of oil, but remained convinced OPEC+ policies would be stabilizing. Crude oil prices declined nearly 30 percent during the last two months of 2018 as fears of an imminent recession and the US-Chinese trade war diminished investor confidence. Meanwhile, the US government is in the midst of its longest shutdown in history with no end in sight. Falih during the weekend said OPEC is on “the right track,” ensuring markets there was indeed a voice of certainty. While OPEC+ has clarity of purpose, however, confusion reigns in other venues.
The price for Brent crude oil ended last week up 6 percent to close trading Friday at $60.48 per barrel. With OPEC+ producers already cutting back by around 600,000 barrels per day, traders were betting on recovery and progress in US-Chinese trade talks.
The market can only tell us so many things about the state of affairs. Perceptions about the state of affairs, however, are often disconnected from reality. It is here where the theory of international relations intersects with the theory of language. When discussing international relations, most conversations focus on the Hobbesian world of realism or Kant’s vision of liberal stability. A third track, constructivism, is rooted in perception and identity. When discussing meaning, Nietzsche noted that when we talk about things like trees and flowers, or even power, we believe we know something about those things themselves.
Language gives us a stable basis point for perception. But we don’t get as much from language as we may think. All we know, and can talk about, is our perception of things, not the things themselves. How it looks may be different than how it is. All concepts, Nietzsche wrote, “are metaphors which do not correspond to reality.” Filtered through international relations, it is how a nation sees itself through this metaphorical lens and how others view it from their position that matters.
“Actors develop their relations with, and understandings of, others through the media of norms and practices,” Ted Hopf, one of the leading scholars on constructivism, wrote. “In the absence of norms, exercises of power, or actions, would be devoid of meaning.”
Speaking in December, OPEC Secretary General Mohammed Barkindo relayed a sense of establishing a normative benchmark in policy by saying market stability was related to prosperity, not only in terms of the economy in broader social life. Stability leads to certainty and confidence, things that OPEC producers need.
“You will see our core objective repeated over and over again: oil market stability on a sustainable basis,” Barkindo said.
That means something. But outside of OPEC, the Trump doctrine of confusion and the British tact for Brexit leave us wanting for the global powers that for at least a millennium provided certainty and confidence to world order. Of the superpowers with a sense of clear purpose, only Russia has shown consistency in the current political age.
It is a week rich in data. We get started Tuesday with the short-term energy forecast from the EIA. Wednesday brings a snapshot of consumer prices in a British economy during an uncertain exit from the European Union. Wednesday also gives us a look at US crude oil inventories. Federal Reserve Bank of Minneapolis President Neel Kashkari speaks Wednesday in New York on market safety a decade after the Great Recession. On Thursday, OPEC publishes its monthly market report for January. It is the IEA’s turn on Friday, but also keep an eye on the University of Michigan’s report on US consumer sentiment. With the week of EIA, OPEC and IEA reports, a Orange alert is in place this week.