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
- Beware of “tariff man.”
- A new economic consensus may be emerging.
- China is infusing itself deeper into the global system.
The downing of a US drone last week amplified the drums of war in the Persian Gulf, though escalation was ultimately averted by a US president reluctant to fire back. US President Trump seems to be at war with his own Cabinet, combating the hawkish voices of his national security advisor and his secretary of state, who appear ready for battle. Eager for optics instead, the president may be in pursuit of a handshake with the ayatollah more than a measured strategy of containing Iran. Amid the dichotomy of a United States both marching toward war and licking its wounds in self-help isolation, China, according to the IMF, is busy embedding itself deeper into the global financial web. A weekend meeting of the ASEAN highlighted Asian tensions such as the plight of the Rohingya Muslims in Myanmar and Chinese territorial ambitions, but also was united in its stance against the tide of protectionism. Meanwhile, China’s grand Belt and Road Initiative was softly supported by the World Bank, giving a tacit recognition of the possibility of a Beijing Consensus.
The global economy is still softening. A flash reading of the manufacturing PMI in the United States was its weakest since September 2009 at 50.1, just barely in growth territory. Military issues, however, overshadowed economic issues last week to drive the price of oil higher. The price for Brent crude oil jumped 7.1 percent from Monday’s close to end the week at $65.31 per barrel.
Indicative of the short-attention span theater that is the modern political age in the digital era, the downing of a US drone on Thursday sent Brent up more than 4 percent, but it was more or less business as usual 24 hours later. A refinery fire at the PES complex in Philadelphia, meanwhile, means regional consumers will be paying more at the pump just ahead of the busy July 4 holiday. Beneath the din of the US news cycle, however, Chinese President Xi Jinping quietly made the case for peace on the Korean Peninsula during a visit to Pyongyang, which was in full pageantry mode for the first visit by a Chinese president in 14 years.
World leaders gather next week in Tokyo for the G20 summit and the US-Chinese trade war will be front and center. With the US federal reserve taking a wait-and-see approach with its latest rate decision, the G20 summit could be a make or break point for global trade. Beijing has shown its ability to take a punch, while at the same time steadily fusing its economic policies with the global order. Last week, the IMF observed that China was opening the door to more foreign investments to the tune of some $450 billion. Not only would foreign investment in China present a windfall, the agency said, but it would also leave China more exposed, and susceptible, to the international norms it’s often accused of skirting. The road ahead for the emerging economies in the Asia-Pacific may nevertheless be bumpy, but systemic change is rarely smooth.
China aims to advance a soft form of economic power in the region through its Belt and Road initiative. This massive infrastructure drive is Beijing’s answer to the Marshall Plan, as suggested last week. The World Bank said Tuesday that creating infrastructure and other links from China to Europe could potentially lift some 32 million people out of substandard conditions, though more transparency would be necessary for the plan to succeed. That contrasts with a trade war started by Washington that could wipe hundreds of billions of dollars off the economic map next year. If progress is not made at the upcoming G20 summit, expect global crude oil prices to slump on waning hopes of economic momentum. With the US president showing no patience for alliances and multilateralism, it may be left to world powers like China to take a more dominant role in the international arena. Writing last week in the Straits Times, Bonnie S. Glaser, a senior adviser on Asia at the Center for Strategic and International Studies, stated that future choices for global players might be less about which power is leading the way and more about which system prevails.
“It is a choice between a future in which there are shared rules and norms within a rules-based order that everyone upholds, and a future in which power prevails, the strong bully the weak, and rules are disregarded in favor of a ‘might makes right’ approach,” she wrote.
With the recent weak PMI reading, a gauge of manufacturing in Texas out on Monday may be worth a look. US Fed Chair Jerome Powell unveils his economic outlook on Tuesday. On Wednesday, it’s London’s turn with statements expected from the Bank of England. Thursday brings both the consumer price index in Germany and another reading of US GDP. And the week ends with data-dump Friday, with the US PCE index, Canadian GDP, the eurozone consumer price index all out on the same day that the G20 meeting kicks off in Japan. Plus, watch the OPEC chatter. It seems like we’re in anything-can-happen territory with oil prices, though sell signals are sounding after last week’s big rally. With “tariff man” on edge, an Orange alert is in place this week, with the price for Brent expected to move by at least plus or minus 2 percent.