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: Yellow
RED: Severe (+/- 4%) ORANGE: High (+/- 2%) YELLOW: Elevated (+/- 1%) BLUE: Guarded (+/- ½%)
THE BOOSTER SHOT
- No big economic jolts ahead, but is that a good thing?
- British risks in the Persian Gulf are nothing new.
- First the Monroe Doctrine, now the Carter Doctrine.
The market focus last week was on fundamentals, with the EIA, IEA and OPEC all offering their assessments about the road ahead. While somewhat pessimistic, forecasts were relatively tepid, with OPEC economists expecting few additional down-side risks and no further escalation in trade-related disputes. That leaves geopolitical issues such as the standoff in the Persian Gulf as among the dominant issues in the marketplace. Great Britain so far is bearing the brunt of the Trump administration’s decision to scrap a landmark nuclear agreement with Iran. Seeking to avert major military escalation in some of the world’s most strategic maritime choke points, British Foreign Secretary Jeremey Hunt said recent talks with his Iranian counterpart were constructive. The conflict in the Persian Gulf is not a US conflict. It’s about who gains influence in this multipolar world.
Mixed economic data helped mute any knee-jerk reactions to Tropical Storm Barry last week. Among the trove of data, the International Energy Agency switched its sentiment from a 500,000 bpd deficit to a 500,000 bpd surplus for the second half of the year. The Kansas City Fed, meanwhile, said energy indices were mixed in the district. A spike in Brent on Wednesday was the standout in an otherwise quiet week. In the end, the global benchmark finished up 3.9 percent to $66.88 per barrel to close Friday.
Through social media channels, Hunt during the weekend said he had a constructive conversation with Iranian Foreign Minister Javad Zarif about the detention of Grace I, a tanker held off the coast of Gibraltar for violating European sanctions on Damascus. The issue, Hunt said in trying to avoid any confrontation with Iran, is about where the oil was headed, not where it came from.
As the political head of the mighty British Navy, Winston Churchill began the race for control over Persian Gulf oil supplies with his decision to convert the Navy from a coal-fired force to an oil-fired force. Putting government funds into the Anglo-Persian Oil Co., which later became BP, Churchill established the link between strategic, national and commercial interests in the Persian Gulf. Oil, writes Daniel Yergin in the seminal book The Prize, had for the first time “clearly become a strategic commodity and an instrument of national policy.” Generations later, US President Jimmy Carter would make this link part of US foreign policy by deterring Soviet expansion with a declaration that the Persian Gulf was in no uncertain terms US turf.
“An attempt by any outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States of America, and such an assault will be repelled by any means necessary, including military force,” the doctrine states.
This Carter Doctrine bears a striking similarity to the British claim over Iranian oil through its investment in the Anglo-Persian Oil Co. The Trump administration’s ambitions in the Persian Gulf are less concrete. On the surface, the policy appears to be more optically ambitious than strategically. Bellicose rhetoric on Iran resonates well with a conservative base swayed by plutocratic decision-makers friendly with players from Israel to the Mojahedin-e Khalq, but rhetoric is not a sound basis for foreign policy decisions. Britain again is making it clear it still has an interest in ensuring its maritime reach is not limited to just the English Channel. And Russia, which has long been interested in extending its influence across the Balkans, has staged a coup of sorts by establishing its S-400 missile defense system in NATO-member Turkey. That gives the Kremlin a front-row seat to one of Washington’s most vital defense instruments, the stealth F-35 Lightning II. Speaking to his Turkish counterpart, US President Trump blamed his predecessor, Barack Obama, for failing to secure a stronger military relationship with Ankara. Now comes word that Trump walked away from the Iranian nuclear deal to spite Obama, leaving rival world powers room to compete for ascendancy in the Persian Gulf. With a stroke of the pen and a dash of malice, Trump may have ceded to US adversaries the very influence that Carter established.
This all leaves strategic control over the Persian Gulf diluted over the multipolar arena of the new world order. While the US military is unrivaled, it alone does not lead to hegemony. There is no hegemony in the Persian Gulf, leaving control over the movement of some 30 percent of the world’s oil up for grabs. Discussing geopolitical stability in a multipolar world, neo-realist thinker Kenneth Waltz noted that parties seeking a common denominator on an issue at hand “risk finding the lowest one and easily end up in the worst of all possible worlds.” With an economic sentiment of decline baked in, geopolitical risk factors like these are essential elements that inform investors about the safety of their portfolio.
A slew of data from China, from second quarter GDP to industrial production, started the week off strong. Tuesday brings US manufacturing production for June and sentiment about the European economy. With housing serving as a good economic barometer, data on US mortgage applications could be worth monitoring on Wednesday. With low growth in Japan, pay attention Thursday to data on consumer prices. The week ends with the University of Michigan sentiment for July. Candlestick patterns last week showed it may be a seller’s market for Brent in the week ahead. And there’s room to move with support levels at around $60 per barrel. But with the onset of the dog days of summer, a Yellow alert is in place, with the price of oil expected to move by about plus or minus 1 percent on the week.