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 drums of war are beating in the Persian Gulf.
- China’s Belt and Road Initiative is Beijing’s answer to the Marshall Plan.
- Recessionary fears outweigh war concerns to drag oil prices lower.
The OECD last week reported that real gross domestic product in the G20 area increased 0.8 percent in the first quarter, though acceleration in the United States and Germany was balanced by deceleration in China and India. On Friday, the International Energy Agency noted an economic slowdown was emerging on the horizon. Looking to next year, the agency said there was enough supply on hand to “meet any level of demand,” adding further weight to concerns about an impending glut. Offsetting sluggish growth forecasts, meanwhile, were incidents in the Gulf of Oman that left two tankers crippled. Washington was quick to blame Iran, though there are more questions than answers about the events last week. In the end, the drums of war were not loud enough to overpower fundamental signals of recession. Next week, members of the G20 meet in Japan to review global trade. With US sanctions upending the status quo, it will be left to cooler heads to keep the liberal order in place.
Tensions in the Persian Gulf region were not enough to pull the price of oil higher on the week. Oversupply in the form of US commercial stocks of crude oil compounded trade concerns enough to spook investors. Even with an itchy US trigger finger, the price for Brent crude oil ended the week down 2 percent at $62.05 per barrel, in line with last week’s Orange alert.
Acting US Secretary of Defense Patrick Shanahan hinted that Washington was perhaps in the early stages of making a case for war with Iran. Speaking Friday, a day after the crews from tankers Kokuka Courageous and Front Altair abandoned ship, Shanahan said Washington would continue rolling out intelligence that US officials say proves Iran was to blame.
“(T)he focus for myself and Ambassador Bolton and Secretary Pompeo is to build international consensus to this international problem,” he said.
Wary of the rush to war, and mindful of Washington’s exaggerated and misleading claims of intelligence in the run up to the 2003 invasion of Iraq, European leaders are calling on Washington to present more conclusive evidence. The United States squandered some of its trust premium under President George W. Bush, failed to address Syrian red lines under President Barack Obama and downright alienated many of its legacy allies under President Donald Trump. In a multipolar system, as one power fades, others move in quickly to fill the space. In this multipolar moment, China is becoming the surprise apostle of the liberal world order.
Chen Xu, China’s envoy to the UN Office in Geneva, said Thursday that Beijing was opening up. Rising to power with its own particular brand of capitalism, Chen said that Beijing does not wish to upend the international order should a new global consensus emerge, but instead work to grow through the reciprocal benefits of open relationships.
“A single tree does not make a forest,” he said. “The strength of a single country is weak. Only cooperation can make a big deal.”
This contrasts with the recent US lack of interest in managing world affairs. Instead of embracing a kind of new Marshall Plan that would constrain disruptive behavior, the Trump administration has goaded friends and foe alike into reactive postures. China, meanwhile, has displayed patience in international affairs, slowly drawing its neighbors in with a sort of sticky power, a term used by Walter Russel Mead to describe a type of economic power that’s inescapable. Through its Belt and Road Initiative, China aims to make trade, investment and infrastructure links to 65 other countries that the World Bank said accounts for more than 30 percent of global GDP and 75 percent of known energy reserves. This is China’s answer to the Marshall Plan, a plan that infused the US system into the global order. Backed into a corner by the United States, Iranian President Hassan Rouhani said last week the Islamic republic was ready to join the emerging world order, including in the strategic arena, alongside China.
“Given its exceptional geographical location, Iran is ready to play an important role in the Belt and Road Initiative,” he added.
If the United States is no longer willing to lead, another power will quickly step to the top of the platform. If the United States can no longer constrain Iran’s behavior, China might. This, as former President George H. W. Bush said a generation ago, may be the new world order.
Monday starts off with a reading of the US housing market with the release of the NAHB index. With home prices soaring, and a recession looming, this could be a factor to watch. A gauge of German and eurozone economic sentiment for June is out on Tuesday. A rate decision is expected Wednesday from the US Federal Reserve. Thursday brings rate decisions from both Japan and the United Kingdom. The G20 meeting in Japan begins Friday. A double-bottom pattern emerged in intraday trading on Thursday, indicating a rebound in crude oil prices is coming. Sell signals are still lit up, however, with resistance levels at around $63 per barrel. With concerns about an “accidental” war in the Persian Gulf and trade tensions high ahead of the G20 meeting, expect some push-pull volatility. A Yellow alert is in place, with the price for Brent expected to move by plus or minus 1 percent.