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: Orange
RED: Severe (+/- 4%) ORANGE: High (+/- 2%) YELLOW: Elevated (+/- 1%) BLUE: Guarded (+/- ½%)
THE BOOSTER SHOT
- Rogue is vogue.
- Brent has a way to go before it hits a new floor.
- Emotions and logic make strange bedfellows.
The running theme in the markets last week was good old fashioned supply and demand. The bellwether ISM Manufacturing reading in the United States for September was 47.8, its lowest level in roughly a decade. Consumer prices are edging somewhat higher and wages have barely moved for US workers. Hard data show the US and arguably the rest of the global economy is in a systemic slowdown, yet the public pulse indicates a level of tolerance. The lower middle class, those seemingly left behind by globalism, believe the system failed them and are now shifting their belief systems away from conventional norms. When faith in the macroeconomic and global political systems fails, people will put their faith in something else. The ideology today, as seen by steadfast support for leaders who a decade ago would have never risen to power, is derived not from logic, but from raw emotions.
Most economic metrics painted a negative picture last week. China’s manufacturing PMI improved slightly, but remains below a mark that would signal confidence. Factory orders in the US economy also slowed. Instead of bouncing off the floor as expected last week, crude oil prices crashed through the support level to establish a new ceiling. It was another week of extremes, with the price for Brent crude oil dropping 5.7 percent on the week to close out Friday at $58.50 per barrel.
The Institute for Supply Management reported last week that confidence was waning in the US business sector. Simply put, things are getting more expensive and trade is getting more difficult. ISM reported that export orders contracted strongly and global trade tensions were rising. Sentiment for September was “cautious,” but confidence is slipping at a faster rate. For US consumers, at least on paper, confidence appears to have reached its peak and will only get worse from here.
Adding to pressure on China, the Trump administration unveiled plans last week to slap tariffs on $7.5 billion worth of European goods, from cheese to whiskey, after winning a dispute at the WTO over aircraft subsidies. European Trade Commissioner Cecilia Malmström said both sides were at fault, according to the WTO ruling, so a “fair and balanced solution” was the preferred option. Countermeasures, she said, would be counterproductive and short sighted.
“Our readiness to find a fair settlement remains unchanged,” she said. “But if the U.S. decides to impose WTO authorized countermeasures, it will be pushing the EU into a situation where we will have no other option than do the same.”
So much for the reciprocity enshrined in the Marshall Plan that saw the United States finance the reconstruction of Europe in order to rebuild the global financial system. That system, according to the pulse of the lower middle class, has failed to deliver. But the preferred agents of change, from Donald Trump to Boris Johnson and Jair Bolsonaro, are by conventional logic making things worse. Multilateralism is constraining according to leaders like Trump, but constraint cuts both ways. No player in an interdependent system can go rogue alone and stay connected. But rogue is in vogue in this new era and there is a fundamental disconnect between the reality on paper and the reality in our social spaces.
The experience for those left behind by globalism has become distorted in the social space where communication happens. Experience cannot occur without some form of abstraction to describe our notion of reality and, as social beings, we need language to relay that abstraction. Language now has a mind-body element – the element we experience at the dinner table – and a mind-media element – the element we experience online and watching TV. The less time we spend at the former, the more we become shaped by the latter. Logic tells us the economy is bad and something needs to change. Our emotional connection with the social space online, however, tells us something about how that change evolves. Logic and emotions make strange bedfellows. Logically, there are few fundamental reasons to embrace the nationalist tendencies that are disrupting the global order. But emotionally, for those angry at the way things are and angry at the way things were, disruption is the way to go.
Not much is on the financial calendar for Monday, though the weekend start of the Johan Sverdrup field in Norway could have a minor impact on the price of oil. We may get clues about US rate policy when Fed Chair Jerome Powell speaks Tuesday in Denver before the National Association of Business Economics. The US dollar moves in tandem with interest rates, but has an inverse relationship with the price of oil. A trove of data comes Wednesday from Mexico and all signs are pointing toward a downturn. US federal data on gasoline and crude oil inventories are also out Wednesday and we may say a continuation of recent builds. FOMC minutes come Wednesday too. Consumer price indices for September are out Thursday and we’ll see if things are indeed getting more expensive. And we end the week with the University of Michigan’s reading of US consumer sentiment for October. There are now support levels for Brent as low as $52 per barrel and there are few good things to talk about these days. Envision deep Orange for the week, with Brent expected to move lower by at least 2 percent on the week.