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 Mueller probe adds an interesting twist to Venezuela.
- Trump’s hope for lower gas prices may limit actions in Latin America.
- Is the Monroe Doctrine no longer valid?
It was a message to the people of Venezuela on January 22 from US Vice President Mike Pence that ushered in the public face of the defense of influence in the Western Hemisphere. In a sudden, clear and well-planned move, the United States and its regional allies then recognized opposition leader Juan Guaido as the interim president of Venezuela. But in a tug of war reminiscent of the Cold War struggles for territory, the United States faces stiff competition from, and entanglement with, Russia.
Beneath the din of the political circus of a federal government shutdown, the international community was once again reminded of the volatility of regime change. Crude oil prices reacted early in the week to tones of a weakening economy from the IMF, but the focus changed quickly to Venezuela. The price for Brent crude oil moved in line with the Orange alert issued last week, ending 1.7 percent lower to $61.64 per barrel.
President Trump is determined to the point of obsession. Threats of sanctions and a “military option” for Venezuela have been common themes in his administration since day one. But it was the marionettists in Washington that are crafting a delicate maneuver to oust Nicolas Maduro.
It was largely the voices from Trump’s inner circle that articulated the statecraft in Venezuela. In September, the administration was vetting coup plans and in November, neoconservative national security advisor John Bolton included Venezuela in his “troika of tyranny.” On Friday, US Secretary of State Mike Pompeo 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 yet seen from this administration.
Spheres of influence are not ghosts of a bygone geopolitical era, but alive and well and evident in the global energy sector. Russia maintains its aspirations in the Balkans with its TurkStream gas pipeline and land grabs near the Bosporus Strait, but has also pushed deeper into the Americas. In November 2017, Venezuelan state-owned oil company PdVSA put up 49.9 percent of its US refining and retail segment Citgo on the table as collateral for a $1.5 billion loan from Rosneft. That means that if PdVSA sinks in the latest government turmoil, Russia will have near-control of a company that has a presence on many of the street corners in the United States.
The Monroe Doctrine in 1823 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. In the modern political era, the Kremlin’s influence runs much deeper as nearly every aspect of the US president’s life is under investigation for collusion with Russia.
The ability of the United States to encourage regime change in Venezuela may be limited. Refineries in the US Gulf region depend on the heavier grade of oil that Venezuela supplies. Refineries in Venezuela, meanwhile, depend on diluent from the United States. And if Trump cracks the whip of sanctions, the resultant spike at the pump would contradict one of his main themes – that of lower gas prices. The tit-for-tat over control over Venezuela will not lead to overt military confrontation, but a confrontation over influence.
“This crisis in Venezuela is deep and difficult and dangerous,” said Abrams.
Expect a strong week in data with the US federal government back in action. Tuesday brings a look at US confidence for January, followed by GDP figures for the fourth quarter on Wednesday. A rate decision from the US Fed is also expected on Wednesday. On Thursday, it’s the European’s turn with fourth quarter GDP for the Eurozone. And back in vogue, rig counts are Friday, adding to the usual weekly fare of EIA data mid-week. We are also expecting a deluge of delayed data releases as government employees return to their desks - although the timing of which are still unknown. On Venezuela tensions alone, it’s another week of Orange ahead, with crude oil prices expected to bounce around in a band of plus or minus 2 percent.