The Geopolitical Energy and Risk Monitoring Report
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
- Winning in a game with many players is hard using a me-first strategy.
- The lowest common denominator for global policies isn’t always a good thing.
- Brent crude oil prices look to be stuck in a sub-$60 trading range.
Though the focus on Iranian-flagged oil tanker Adrian Darya 1 was near relentless in some circles, economic war dominated the headlines last week. The US president at the G7 meetings in France this weekend hinted that he had more financial weapons to use, saying his only regret in the US-China trade war was not hitting hard enough. China, for its part, called for a “calm attitude.” On Saturday, European Commission President Donald Tusk said that trade wars lead to recession, lamenting also that the world’s wealthiest nations were facing a difficult test of unity. The European Central Bank added that trade was clouded by uncertainty and there was “no clear sign of stabilization.” The modern era of protectionism and nationalism, exemplified by US trade policies and Brexit, shows the liberal world order is unraveling. The modern era is also characterized as a multipolar one, with no clear demarcation between friend and foe. In a bipolar system, such as the one that dominated the Cold War, strategy is easy because there’s only one opponent and therefore only one thing to worry about. In a multipolar system, strategy is difficult and instability rules the day.
The sentiment for the world economy is souring. The US and German economies may already be in recession by some reads and the US-Chinese trade war shows no signs of a cease-fire. US Fed Chair Jerome Powell said the economic landscape was “turbulent,” a characteristic that again described the trend for Brent crude oil prices. Brent during intraday trading on Friday lost 2.5 percent, but recovered by the close. In the end, Brent finished the week up 1.2 percent to $58.80 per barrel.
“Geopolitical events have been much in the news, including the growing possibility of a hard Brexit, rising tensions in Hong Kong, and the dissolution of the Italian government,” Fed Chair Powell said last week. “Financial markets have reacted strongly to this complex, turbulent picture.”
The White House on Saturday released a memo on the US agenda at the G7 meeting in Paris. The Trump administration, the document reads, is focused on addressing its “sovereign obligations” in the international arena. US policy is guided by a sort of self-help agenda that puts national interests first. This may be something of a reaction to the overextension of national power. Henry Kissinger as US secretary of state worried that national concerns in an interdependent world are so diverse that focus becomes difficult and state leaders become distracted by international issues to the detriment of national focus. For the middle class, this becomes a scapegoat for why the liberal order didn’t work. If national focus is on international issues, then it must be the international issues that are harming things at home. The answer is a retreat into nationalism and protectionism in an effort to make the nation “great again.” The sovereign obligation, therefore, is decidedly me-first.
Self-help, however, may lead to self-harm. The game of liberal interconnectivity is a non-zero sum game, where results are shared across multiple players. Interconnectivity, for better or worse, is also constraining. For some, those shackles seem detrimental. But at the systemic level, those constraints are beneficial because they harness the tendency for tyranny while also limiting the behavior of actors that may try to swim against the tide. Constraints in a non-zero game may also help manage volatility, ensuring that no one actor can hijack the system. That may in part depend on what type of system describes the international arena. In a bipolar system, one where the lines of demarcation are absolute, decisions about what to do in the liberal order are easy. Self-help in this setting may be more of an encompassing term to describe the collective action of allies lined up on either side of the spectrum. In a multipolar system, where the options are more fluid, decisions about what to do in the liberal order are difficult. Kenneth Waltz, one of the leading scholars of international relations theory, said that in a multipolar world, “states often pool their resources in order to serve their interests.” In the win-win world of liberalism, that’s a good thing. But Waltz is criticizing, not defending. From the EU commission president to the chairman of the US federal reserve, what Waltz says next is prophetic.
“Parties engaged in cooperative endeavors must look for a common denominator,” he wrote in his Theory of International Politics. “They risk finding the lowest one and easily end up in the worst of all possible worlds.”
Monday may be something of a reflective day as traders digest the various statements coming out of France. For data, Monday brings a reading of US durable goods orders. The expected decline from the previous reading would indicate that consumers are reluctant to spend big money in the current economic climate. That sentiment would be backed up if the gauge of US consumer confidence drops as expected on Tuesday. For crude, this week’s reading on US inventories could again bring surprises. Thursday presents the latest look at US and French GDP, as well as indices on German unemployment. Canada publishes data on GDP on Friday, as does Italy. And, as always, watch the Twitter feed. Brent may be supported by inventory reports this week, though bearish trends look to otherwise dominate. Brent needs to jump by only 0.5 percent or so to reach and hold above the psychological level of $60, but as mentioned, this seems a tough task for now. Taking the long view, a Yellow alert is in place for the week, with Brent expected to move by about plus or minus 1 percent.