Welcome to Dan Graeber’s weekly commentary on the intersection between geopolitical events and the price of oil. The indicator is based on the expected price volatility by the end of the current trading week.
Risk level: Yellow
RED: Severe (+/- 4%) ORANGE: High (+/- 3%) YELLOW: Elevated (+/- 2%) BLUE: Guarded (+/- 1%)
THE BOOSTER SHOT
- Is the Carter Doctrine still viable?
- Libya primed to be the market disrupter du jour.
- Will the next global leader please stand up.
Forty years ago, the US market was bound tightly to suppliers such as Saudi Arabia, and US consumers paid the price. With the US economy sideswiped by the Arab oil embargo in the 1970s, President Jimmy Carter enshrined protection of Middle East oil into US national security doctrine. A generation later, the US oil sector, now rivaling the largest OPEC producers, was introduced to the export market under President Obama and stimulated further by the dismantling of environmental restrictions by President Trump. Consequently, US interest in foreign management is waning, with the Trump administration vocally seeking an offramp to Middle East conflict. Waning interest in guiding affairs overseas, however, leaves the region exposed to considerable risk, with few other powers capable of mirroring the seemingly benign hegemonic management tendencies of Washington. In its wake is a chaotic fight for control, showing nationalistic interests run counter to global needs.
Market headlines were dominated last week by the Phase 1 trade deal signed between the United States and China, though a lack of specifics created more questions than answers. Frozen by uncertainty, the price of oil barely moved. Brent crude oil ended the week at $65.10 per barrel, down 0.2% from the start of the trading week.
President Carter in his January 1980 State of the Union address expressed concern that Soviet movement in Afghanistan posed “a grave threat to the free movement of Middle East oil.” Taken up as a corollary by President Reagan, those concerns eventually laid the ground work for US military operations in the Middle East. US crude oil production at the time of Carter’s address was around 8.6 million barrels per day, according to Federal data. For 2019, the US Energy Information Administration reported US oil production at 12.2mn bpd and the forecast for 2020 is for 13.3mn bpd.
“We are now the number-one producer of oil and natural gas anywhere in the world,” President Trump remarked on January 8. “We are independent, and we do not need Middle East oil.”
Indeed, figures from ClipperData show the US market taking in fewer barrels from the Middle East during the Trump presidency. Defined as five suppliers, total US imports from the Middle East declined some 50 percent from 1.7mn bpd in 2017 to 860,000 bpd last year.
That, as noted last week, provides cover for the Trump administration to scale back its commitments to the Middle East. Apart from supporting a staunch ally in Saudi Arabia, as was the precedent under the Reagan and later administrations, Washington seems to no longer have a vested interest in the region apart from containing Iran. In its wake, powers such as Russia and China are exerting their influence, but to less effect than Washington. To turn a phrase on its head, superpowers Russia and China do not share Washington’s experience, good or bad, in doing windows.
Libya and Iraq are cases in point. Since dismantling the multilateral nuclear deal with Iran, policy planners in Washington have struggled to balance US security interests against Iranian aspirations in Baghdad. No longer willing to extend dominance over the horizon as it did during the Bush II administration, Trump finds it difficult to maintain a foothold in Iraq. The fallout from that is telling. The International Energy Agency in its monthly report for January said recent events in the Middle East show that Iraq is among the more vulnerable suppliers. By the IEA’s read, the US market remains dependent on Iraq. While fluid over a shorter time period, ClipperData figures show total US imports from Iraq averaged the same in 2013 as they did last year – some 320,000 bpd. Steady reliance on a volatile Iraq, the IEA suggests, makes it “more difficult to ensure there is sufficient spare production capacity to meet rising global demand in the second half of this decade.” Stated interests aside, Iraq still matters.
German Chancellor Angela Merkel hosted international delegates in Berlin during the weekend to seek a resolution to the crisis brewing in Libya since the dawn of the Arab Spring. Standing front and center during the conference was Merkel, joined by the presidents of Turkey, France and Russia. While US delegates were in attendance, their voice was quiet. But Libya still matters in the global energy market. Since 2013, ClipperData figures show total Libyan export loadings increased from 800,000 bpd on average to just over 1mn bpd last year. During the weekend, tribal forces in Libya declared operations were closed at several of Libya’s top exporting fields. The last time Libyan conflict degraded export capacity, the IEA called on its members to act. Libya too is an international management priority.
The United States is no longer the superpower that it was in the administrations leading up to the Trump era, in part due to management fatigue. In the energy market, the 13.3mn bpd expected from the United States gives it cover to address the domestic issues that nationalist supporters say were neglected during its apex of power. The drawback from the Middle East by that logic is justified. From a global perspective, however, some form of management is needed, as evidenced by opposition Libyan military leader Khalifa Haftar’s courtship with world powers in Moscow, Athens and Berlin. Carter and Reagan worried that losing influence meant exposure to economic risk. While the rise of nationalism means hegemony is less of a national security interest, some form of international management is necessary to protect the global economy from disruptions to the flow of oil from North Africa and the Middle East. Which global power has the ability and the appetite to do that remains to be seen.
Disruptions at Libyan oilfields may encourage modest gains in crude oil prices. Figures for Japan’s first quarter forecast for GDP are out on Monday. On Tuesday, Bank of England Governor Mark Carney kicks things off at the World Economic Forum in Davos, a forum that’s expected to be noisy with the arrival of President Trump. Wednesday brings a trove of economic data from Canada, though it’s far to soon to expect an impact from the extreme cold crippling the nation’s oil industry. With recessionary strains apparent, a reading on manufacturing from the Kansas City Fed on Thursday may be telling of expected trends for 2020. And the week ends in all-hands-on-deck fashion, with economic leaders from US Treasury Secretary Steven Mnuchin to ECB Chair Christine Lagarde expected to speak from Davos on Friday. Due mostly to tensions in Libya, a Yellow alert is in order, with crude moving by plus or minus 2% on the week.