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 collapse of the liberal order was met with awkward silence.
- A state with few other strategic assets is still influential if it has oil.
- The wagons are circling Iran.
A handful of the world’s leading oil producers are coping with internal issues that, in one way or the other, add real risk factors to the market. Though Nicolas Maduro clings to power in Venezuela, the movement of oil from one of OPEC’s founding members could slow precariously. Libya, meanwhile, is a divided country where security remains shaky at best. In Nigeria, the situation is tense ahead a delayed presidential election. In the broader Middle East, the map of allegiances is pressing in on the Shiite Crescent from all sides. All this comes as the liberal order collapses on a multipolar world. When foreign policy obligations are diverse, priorities are difficult to establish. Diluted across multiple lines, the power to exert influence therefore becomes weakened. When this happens, vulnerabilities increase.
Five OPEC producers – Iran, Libya, Nigeria, Saudi Arabia and Venezuela – faced supply-side issues or threats in one form or the other last week. That helped push the price of crude oil beyond the $65 threshold on Friday. Brent finished the week up nearly 8 percent, closing the week out at $66.31 per barrel.
A US-led meeting in Warsaw last week was aimed at persuading the world that Iran was the primary threat to stability. Speaking Thursday from Poland, US Vice President Mike Pence said terror and destruction were among Iran’s trademarks. Many of the world’s powers, however, sent only low-level delegates - if any - to the meeting. Two of Europe’s greatest powers, Germany and France, sent no delegates at all and British Foreign Secretary Jeremy Hunt left Warsaw before the main event. Sadly, Pence said, European powers are no longer on the same side as the United States. Targeting Europe’s “Special Purpose Vehicle” designed to facilitate business transactions with Iran, the vice president said the rift between Europe and the United States was widening.
“We call it an effort to break American sanctions against Iran’s murderous revolutionary regime,” he said of the SPV. “It’s an ill-advised step that will only strengthen Iran, weaken the EU, and create still more distance between Europe and the United States.”
Meanwhile, Saudi Crown Prince Mohammad bin Salman, unscathed by ties to the killing of Jamal Khashoggi, arrived on Sunday in Pakistan, days after a Sunni terrorist group claimed responsibility for an attack on the southwestern border of Iran that left at least 27 members of the Islamic Revolutionary Guards Corps dead.
Saudi Arabia and Iran have long been engaged in a proxy war in Yemen and now the kingdom is encircling the Islamic Republic in a courtship with Pakistan. Speaking ahead of the crown prince’s arrival, Pakistani Prime Minister Imran Khan said both countries were brothers in arms on global security issues. The Sunni powers of the world are circling Iran.
Russia, meanwhile, continues its long history of vying for influence in the former Ottoman Empire by courting countries such as Turkey. The map of alliances on the borders of the Shiite Crescent are similar in ways to the situation Germany faced before World War I. This time, however, the encircled power is not bent on expansion, but shrinking under international pressure from all sides. From the northwest, Europe is working to keep Iranian financial channels open.
From the east and north, Russia has never given up on its regional ambitions. From the south, it’s the oil-rich de facto leader of OPEC that continues pushing inward. At stake is influence over some of the world’s richest oil reserves. Hans J. Morgenthau, one of the founding fathers of international relations theory, said that a state that is powerless in all other respects can wield enormous influence if it has control over the flow of oil. For the West, this is a page worth bookmarking.
Emerging multipolarity opens new lines of obligation and new lines of vulnerability. In this type of world, former Secretary of State Henry Kissinger wondered “whether interdependence would foster common progress or common disaster.” At the Munich Security Conference, the change in the international system was loudly declared in the awkward silence that met Pence when he extended a greeting from President Trump. Writing before the occasion, MSC Chairman Wolfgang Ischinger said the “whole liberal world order appears to be falling apart.”
It will be a light week data-wise, starting Monday with a US federal holiday. With more US borrowers late on their car payments, Tuesday’s issuance of the NAHB Housing Market Index may be indicative of any broader trends on loans. Wednesday brings the minutes from January meeting of the US Federal Open Market Committee. Manufacturing indices from the European economy are published on Thursday, as are durable goods orders in the United States. Friday brings a spattering of speeches from global federal reserve chiefs. If $65 holds as the new floor, the next target could be $70 per barrel for Brent. At some point, that could spill over to consumers and weigh on the broader economy. An Orange alert is in place for the week, with oil prices expected to move by at least plus or minus 2 percent.