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
- Turkey gets what it wants in the Middle East.
- The price for Brent is moving closer to a floor.
- US adversaries may gain an upper hand in the Middle East energy sphere.
The theme last week was economic malaise and geopolitical turmoil. The International Monetary Fund downgraded its forecast for growth in the global economy to the slowest pace since the Great Recession. Trade tensions between the United States and China, the IMF stated, was likely to reduce global GDP by 0.8 percent by next year. In political theater, the acting White House chief of staff muddied the waters by acknowledging favors were indeed tied to US funding for Ukraine. And in foreign policy, the White House declared victory with claims of a stand down in the Turkish offensive in Syria. President Trump in a statement to reporters said Friday that the United States had “taken control of the oil in the Middle East” after the pause in the fighting. The state of political and economic affairs is, in a word, messy. The fallout of mismanagement is not only reshaping global supply chains by way of freight restrictions, but also reconfiguring the chessboard of the Middle East.
The price direction for crude oil followed expected downgrades for the fourth quarter. Slow growth in China and a build in US crude oil inventories pushed Brent lower for the week. The global benchmark finished the week down 1.8 percent to end trading Friday at $59.42 per barrel.
The Turkish incursion into Syria seemed to have come to an end as quickly as it started. A hasty withdraw of US forces left a void filled by a Turkish military eager to contain its Kurdish enemies, though those same Kurdish groups were integral in the multilateral effort to defeat the so-called Islamic State in Syria. The geopolitical dynamics were fluid, with the United States both alienating a long-time ally in the Kurdish forces in Syria and tacitly supporting the national defense interests of NATO member Turkey. It was telling, however, that Turkish President Recep Tayyip Erdogan tossed a warning letter from the US president in the trash.
“We got what we wanted,” Turkish Foreign Minister Mevlut Cavusoglu said.
Turkey through the deal is able to expand its sphere of interest into Syria by way of a “safe zone” that will be “primarily enforced” by Turkish forces inside Syrian territory. US military forces, for their part, have moved to the background, ceding some of the political influence in the region to adversaries such as Iran and Russia. With Lebanon engulfed in the flames of public discontent, the Iranian proxy Hezbollah will be distracted from seizing regional momentum, but for only so long. Russia, which has long sought to expand its belt of influence to the Mediterranean, notches a win by simply standing its ground. Russia last week already solidified its claims to the region by sending gas through its TurkStream pipeline in the Middle East. The Turkish president next week meets his Russian counterpart in the Black Sea resort town of Sochi, hoping to secure even more regional coordination.
Yet, it was President Trump who told reporters it was the United States that was in control of the regional oil. The US Energy Information Administration estimates Syria holds some 2.5 billion barrels of oil reserves in fields positioned in the east near the border with Iraq. Some three years ago, much of those fields were controlled by the so-called Islamic State, giving the militant group a gushing stream of black-market revenue. Hundreds of detained members of the Islamic State were able to flee Syrian captivity during the Turkish offensive, though the group is likely unable to gain the regional influence it once had. The Turkish president said Saturday that the five-day pause to the fighting ends Tuesday, the day he meets with President Putin. If things on the ground don’t go his way, he said, “We will be going ahead with the operation and will keep on destroying terrorists,” suggesting there will be no let up in military conflict.
US forces in 2003 inadvertently destroyed parts of the Kirkuk-Banias pipeline that runs from northern Iraq to the Syrian port city of Banias on the Mediterranean. In theory, a revitalization of that pipeline would ease some of the maritime tensions in the Persian Gulf, though the Turkish offensive would be a distant memory by then. Before the civil war in Syria erupted in 2011, the government in Damascus was able to count on oil and natural gas for about a quarter of its revenue. Several subsidiaries of the state-owned Syrian Petroleum Company included partners such as Royal Dutch Shell, French supermajor Total, India’s Oil and Natural Gas Corporation and Chinese National Petroleum Company. One of the last companies to halt operations in Syria, Gulfsands Petroleum, is a British company that lasted a year into the civil war before sanctions forced it out. Trump’s statement on control over the oil shows the region is still of paramount importance to the global economy, with or without a slow-march to a low-carbon future. The Carter Doctrine holds that US foreign policy is integrally linked to oil in the Middle East. The doctrine is military in nature, noting that any “attempt by an outside force to gain control of the Persian Gulf region” would be seen as a threat to US interests. “Such an assault,” Carter said during his 1980 State of the Union address “will be repelled by any means necessary, including military force.” With the US president clinging to his pledge to retreat from “endless wars,” the influence gained by military force may be left to those with boots still on the ground in Syria.
US sanctions on Chinese shipping giant COSCO are interrupting freight traffic as shippers favor short-haul voyages. The premiums may impact flows coming out of the US Gulf region, though WTI continues to be heavily discounted to its international counterpart.
British lawmakers during the weekend rejected an amendment that would have opened the door to a clean Brexit and ramifications of that will likely spill over into Monday trading. Tensions in Lebanon, meanwhile, suggest the region as a whole could be approaching another breaking point. Pay attention Monday when the producer price index in Germany is published as the country’s economy may already be in recession. Data on existing home sales in the United States are published Tuesday. Wednesday brings the regular trove of EIA inventory data as well as a gauge of consumer confidence in the eurozone for October. S&P on Thursday issues a rating on sovereign debt for the British economy and it could be damning given the economic consequences of a no-deal Brexit. The week ends with a rate decision and policy speech from European Central Bank chief Mario Draghi. Some bullish patterns emerged in the Brent chart late on Friday and there could be something of a bounce at the front end of the new trading week. Most indicators are for a selling appetite, however, so it may be something of a push-pull week for oil. A Yellow alert is in place for the week, with Brent moving by about plus or minus 1 percent.