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
- Globalism is dead. Long live globalism.
- US political implosion makes leadership difficult.
- Mind the spread.
The market impact of the September 15 attacks on Abqaiq infrastructure in Saudi Arabia has been muted so far, though geopolitical risk is still in fashion. On Friday, the price for Brent crude oil lost about 2.3 percent in the span of about three hours on headlines that Saudi Arabia was keen on a partial cease-fire in Yemen, the alleged source of the Abqaiq attacks. That was pushed aside, however, by the political implosion in the United States sparked by impeachment inquiries on Donald Trump. The pending circus will leave one of the world’s leading superpowers distracted for months ahead of the 2020 presidential election cycle. A president fighting for his political life may be something of a more aggressive president in terms of economic and foreign policy. US sanctions imposed last week on Chinese vessel managers saw freight rates already boosted by the Saudi Aramco attacks jump even more. That shows that the secondary impacts of aggressive economic policy are spreading, and it will eventually start to impact the US economy.
A slowing economy means a surplus of products, creating headwinds for Brent. The spread between Brent and WTI, meanwhile, is widening, incentivizing US exports of light-sweet crude, exacerbating the glut situation. In the end, Brent finished the week down 3.6 percent to close out trading Friday at $61.04 per barrel.
US consumer confidence for September was lower than expected, showing the pulse in the world’s leading economy is slowing. China, the No. 2 behind the United States, continues to feel the strains of the trade war. And instead of hope and optimism, the running theme at the UN General Assembly meeting last week was despair. UN Secretary General Antonio Guterres kicked off the meeting Tuesday by observing that “We are living in a world of disquiet.” Storm clouds are clear on the horizon.
President Trump in his speech at the UN General Assembly doubled down on his purported US-centered world view and agenda. The future, the president said, “does not belong to globalists.” Trump since taking office has pursued a policy of independence, disparaging traditional allies and alliances alike. From trade to treaties, the Trump administration has sought to unshackle the United States from the perceived constraints of the liberal world order. By his world view, globalism is inhibiting and any decision is primarily a selfish decision. But even with this one-sided agenda, actions have consequences and connections run deep.
Sentiment matters. The US Conference Board noted that escalating trade tensions “have rattled consumers” and the diminishing confidence in the economy could threaten one of the longest expansions in history. Trade and tariff tensions are the result of Trump’s effort to, as he sees it, level the playing field. The economy is his way of waging wars to change adversarial behavior. On Wednesday, the US Treasury Department imposed sanctions on Chinese firms involved in transporting Iranian crude oil, including subsidiaries of state-owned COSCO Shipping Corp. That led to a jump in VLCC rates as charterers looked to shield themselves from dealing with one of the world’s largest shipowners. Freight rates spiked after the Abqaiq attacks and were expected to rise in general, according to the UN Conference on Trade and Development. An increase in freight costs leads to an increase in consumer prices, which can lead to an economic slowdown if the pressure is too high. Meanwhile, the general economic slowdown is creating a glut in terms of petroleum products, with US oil exports increasing and imports of refined products waning. Because it’s one of the things consumers purchase with the most frequency, retail gasoline prices paint something of a different picture, at least for the US economy, because they remain low by relative standards. Prices at the pump will only head lower through the rest of the year. In Trump’s world view, globalism is inhibiting, though his efforts to change that are themselves inhibiting. There is no escape from interconnectivity.
For hard data and with freight rates in mind, watch Monday for a reading of the consumer price index in Germany. CPI for the entire eurozone comes Tuesday. On Wednesday, watch US crude oil inventories. A build would be a sign of further economic cooling as it would show that even pipelines coming out of the Permian aren’t enough to offset waning demand. More signs of the status of the US economy comes Thursday in the form of durable goods orders and the week ends with a look at payrolls in the world’s leading economy. Brent still has room to move lower before hitting a support level in the neighborhood of $60 per barrel, but some momentum could be expected given the general bullish trend since August. Volatility should cool off, though, so an Orange alert is in place, with Brent moving perhaps upward by about 2 percent for the week.