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
- Apathy is setting in.
- EIA lowers Brent forecast by $5/bbl.
- Beware of cults of personality.
It was a relatively quiet week for the oil markets with attention largely focused on impeachment proceedings in the United States, the Turkish campaign in Syria and the run up to the International Maritime Organization’s sulfur cap. Even a trifecta week of EIA, OPEC and IEA reports, a week that would normally be awash in demand-centric headlines, barely registered in the price of oil. It was, however, another week of bad economic news, with US wages dipping and British production figures collapsing. There were also few positive statements about the state of political affairs. So it was left to a week-ending sign of hope with claims of an early breakthrough in US-China to move the needle. The blasé market performance over the last week, however, could be indicative of a level of apathy with the current state of affairs.
The only real movement on the price of oil came Friday when US President Donald Trump declared progress was made in US-Chinese trade talks. In crude oil, OPEC has expressed interest in production discipline, though that was largely balanced by weak economic sentiments. The EIA, for its part, lowered its forecast for Brent by $5 per barrel from its September estimate to $59 per barrel for the fourth quarter. Brent did manage to finish in the black, however, up 3.7 percent on the week to close at $60.66 per barrel.
Trump’s statement on trade talks Friday is emblematic of the state of confusion in modern political affairs. Standing before Marine One, the presidential helicopter, the president said both sides had reached one of the most important trade agreements in a long time.
“We have a great deal. We’re papering it now,” he said. “Over the next three or four or five weeks, hopefully it’ll get finished.”
A deal with no deal. Yet in an era riddled with bad news, the remark was enough to jolt the markets. Brent moved from a low point of $59.21 per barrel to finish up 2.4 percent on the day, the VIX, an index which measures volatility, plummeted and major stock indices finished in positive territory. S&P futures pointed to a strong open on Monday. The market discussion here so far ignores claims that Iranian-flagged VLCC Sabiti was forced to limp home after suffering damage during missile strikes in the Red Sea. The IEA in its monthly report for September noted that “intuitively” such an event should have sent the price of oil sharply higher.
“There should be talk of a geopolitical premium on top of oil prices,” the report read. “For now, though, there is little sign of this with security fears having been overtaken by weaker demand growth and the prospect of a wave of new oil production coming on stream – Norway’s big Johan Sverdrup project started up this month and will reach 440,000 bpd by mid-2020.”
September 14 attacks on oil installations in Saudi Arabia resulted in the largest single-day spike in crude oil prices in history, yet Friday’s strikes on Sabiti barely caused a blip. Instead of taking the IEA’s line that economic woes override any sort of risk premium, the market may be becoming numb to what would once cause considerable volatility. Things like bombings, vessel seizures, momentous trade deals, the investigation of a sitting political leader and the unraveling of alliances all would have once triggered abnormalities in equities and commodities, but they are now given only passing consideration. In a word, the market has become somewhat apathetic.
Apathy is the lack of emotional attachment. A trade breakthrough described by the US president as one of his biggest deals to date was met with a passive 1 percent bounce in stock indices. The Iranian tanker attack was a faded memory by the time US markets opened. A passionless reaction suggests a sort of apathy has set in toward global institutions. When events that should be high profile become meaningless, there is a breakdown to a degree in proper functionality. For Plato, there were three classes of people; the philosopher king, the soldier and the money-making partisan. For society to work in the Platonic world, each class needs to perform its proper function. Those classes today are not functioning properly. In the same way that religion compels its disciples toward certain disciplines, the Platonic philosopher king should instill a sense of faith in the national system. But when this type of faith erodes, it’s not the rise in the power of nations that’s troubling, but the rise in the power of men. From Putin to Trump, there is no longer faith in the unseen force that guides the sovereign. Instead, as Rousseau warned, men are compelled by the consuming ambitions that veil a “wicked tendency” behind a “mask of benevolence.” The national political machine has given way to a cult of personality.
The news cycle on Monday may shift focus away from US-Chinese trade negotiations toward US military action in the Middle East and the continued Turkish deployment in Syria. In market news, watch the reading of the Chinese consumer price index. German and eurozone sentiment indices are out on Tuesday. Wednesday brings the usual EIA data and advance retail sales figures for the US economy. US industrial production and housing start figures are published on Thursday, as is Chinese GDP data. And the week ends on something of a quiet note, with only the rig count making a splash worth noting. Expect something of a quiet week in market news, though don’t discount geopolitical tremors. A Yellow alert is in place, with the price of Brent expected to move by only plus or minus 1 percent on the week.