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
- US political distraction has economic consequences.
- Patience is a virtue in the geopolitical game of chess.
- There’s always an energy angle.
Economic news took a back seat to the political theater that played out during the impeachment hearings for US President Donald Trump. During testimony last week, Fiona Hill, the former Russia director for the National Security Council, warned that the Kremlin has deployed “millions of dollars to weaponize” political opposition in the United States. Contemptuous political discourse is now a dominant characteristic in Washington and it can be all-consuming. That distraction has consequences. In early November, researchers at the University of Michigan found that a president distracted by political events would leave negative marks on the economy. Those marks, analysts warned, could be long-lasting.
Several market factors worked in tandem to balance each other out last week. Doubts over progress in US-Chinese trade negotiations worked as a drag on Brent, while a smaller-than-expected build in US crude oil inventories and OPEC production restraints offered a tailwind. The price of oil barely moved last week, with Brent edging up just 0.14 percent to finish at $62.37 per barrel.
The US president is clearly preoccupied with his political fate. This preoccupation, according to Hill’s testimony, is by design. The Kremlin was able to systematically hijack the US democratic process during the 2016 race and continues to do so to this day, she said. Hill warned that truth and those that purvey it are routinely questioned, partisanship is destroying the political machine and US influence is waning as a result.
“The Russian government’s goal is to weaken our country – to diminish America’s global role and to neutralize a perceived US threat to Russian interests,” she testified. “President Putin and the Russian security services aim to counter US foreign policy objectives in Europe, including in Ukraine, where Moscow wishes to reassert political and economic dominance.”
At least tangentially, the impeachment inquiry is related to energy. A debunked narrative offers that Ukraine, not Russia, was behind US election interference and former Vice President Joe Biden, a front-runner challenger to President Trump, is a corrupt influence in the region by way of his involvement with Ukrainian gas operator Burisma. Ukraine hosts a vast network of Soviet-era pipelines that deliver Russian gas to Europe, giving the Kremlin the structural tools necessary to exert control over regional economic affairs. Russian foreign policy is extended through its energy infrastructure in Europe, reaching deep beyond the traditional Soviet belt of influence into Turkey with its Turkstream pipeline and into Germany with the Nord Stream gas network. The United States, however, is able to get its liquefied natural gas into places like Lithuania, once part of the Soviet backyard, and its light-sweet crude oil is taking market share in Europe. ClipperData figures show total European imports of US oil over the first 10 months of the year averaged 847,000 barrels per day, a staggering 70 percent increase over the same period in 2018. But by pure logistical terms, however, the United States cannot duplicate Russian leverage over the regional energy sector.
By design and by chance, US leverage in the global community is waning. Part of the Trump doctrine states that go-it-alone policies and self-interest will advance US ground lost to globalization. Making America great again, by this belief, requires a scorched-earth approach to foreign and economic policy. The retreat from Syria was part of a pledge to end US involvement in never-ending wars, but that also opened the door for increased Russian influence. American diplomat George Kennan observed more than 70 years ago that the Kremlin was a patient political force and his words remain true today.
“Like the Church, it is dealing in ideological concepts which are of long-term validity, and it can afford to be patient,” he wrote in Foreign Affairs.
To contain Russian advancement, Kennan advocated for a “long-term, patient but firm and vigilant containment of Russian expansive tendencies.” Patience, however, is not one of President Trump’s fortes. Leaving foreign matters for the foreigners, the Trump administration is pressing for me-first strategies to prop up the US economy first and foremost. His trade policies have been blamed for slowing growth, but at least for now, the global economy seems to have averted recession. A snapshot of the US economy from the New York Fed finds GDP advancement slipped from 1.96 percent on September 20 to 0.39 percent less than a month later. But the trend is reversing. Equities, meanwhile, have been in bull territory for much of the second half, leaving American consumers feeling confident ahead of the holiday spending season. Before the impeachment hearings, however, researchers at the University of Michigan examined whether a distracted president was good for the economy. It found that just over half of the respondents expected negative consequences should the president become distracted by non-economic affairs.
“Given the importance of fiscal policies to minimize any potential downturn, a diminished focus could be consequential in the year ahead,” researchers found.
It will be a light week with US holiday goers breaking early for the long Thanksgiving break. Motor club AAA said it is expecting a record amount of people to take to the roads, straining supplies and leaving US refiners looking for more cargoes. Tuesday brings data on the US trade balance, a data point that will provide key information on the impact of the trade war. US consumer confidence figures are also out on Tuesday. Another look at US GDP is out on Wednesday. Beyond that, it’s holiday time in the US so things quiet down considerably. Retail sales data on Black Friday, however, could be indicative of things to come in the world’s largest economy. It will nonetheless be a quiet week. A Yellow alert is in place, with Brent expected to move only by around plus or minus 1 percent on the week.