The Geopolitical Energy and Risk Monitoring Report

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Welcome to Dan Graeber’s 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: Orange

RED: Severe (+/- 4%) ORANGE: High (+/- 3%) YELLOW: Elevated (+/- 2%) BLUE: Guarded (+/- 1%)

THE BOOSTER SHOT

  • A viral fear factor pushed Brent below $60/bbl.
  • Recessionary strains are apparent in the US manufacturing.
  • GDP readings for major economies will be market-movers this week.

The price for Brent crude oil had one of its worst weekly performances in recent memory on concerns the outbreak of the coronavirus would crimp global demand. Though Chinese New Year celebrations were curtailed, those fears may be somewhat unfounded as only about 3% of the global afflictions thus far have proved fatal. This may be indicative of a fear factor in the price of oil that has become more pronounced in the age of social media. That said, there have been recessionary drums pounding in the economy, with the manufacturing sector among the hardest hit. IHS Markit reported its manufacturing PMI hit a three-month low in January. While there may be some degree of hype behind slumping crude oil prices, the market does appear to have something of a demand problem.

The stars aligned for a strong retraction in the price of Brent last week. OPEC’s secretary general said it was too early to discuss extending voluntary production restraints, the EIA reported a draw in US crude oil inventories that was less than expected and the coronavirus sent jitters across global trade channels. Rolling over to the March contract, Brent crude oil finished the week down 6.4% to $60.69 per barrel.

The novel 2019 coronavirus has infected some 5,000 people worldwide, spreading outside of China to major economies such as France and the United States. The pneumonia has been contracted by person-to-person contact and is spreading rapidly, with Chinese officials reporting some 1,300 new cases during the weekend. Chinese authorities have enacted strict measures to control the outbreak, and officials said recently the virus is spreading before symptoms manifest. While weekly data comparisons should be taken with a grain of salt, total Chinese crude oil imports over the first three weeks of the year are down some 8% from the same period last year, according to ClipperData figures. The weekly average so far in January, however, is in line with the historic average.

In the context of social media, the concept of importance becomes amplified, making the first global health scare of the modern media age even more frightening. If social media is relative to social space, and if language creates our world, then thought does not exist independently of the world we create through language. Instead of dealing with things themselves, we are dealing with the things we create through language. Consider how Iran describes the world versus how the United States describes the world. For its part, mass media provides simplified and selective identities for places beyond the realm of the immediate experience of the audience and therefore creates something of a surreal-, or even a pseudo-world. When the message relayed through social media is an emotional one, the consequences of this phenomenon are profound. With emotional messages where personal well-being is at stake, the focus shifts to a problem that may not actually exist and consumers become consumed by fabricated problems. And like a virus, this concept of reality spreads exponentially and can have pronounced impacts on consumer behavior, sending a jolt through the market.

Elsewhere, there are real demand concerns. IHS Markit in a flash reading of US manufacturing last week reported the PMI fell to 51.7 in January, a three-month low. Respondents to a December survey from the Dallas Fed said the US-Chinese trade spat had hurt manufacturers who were struggling to cope with the increase in the price of steel. And to back the point on the impact of the media, one respondent said “the media has gotten the public thinking negatively.” To that, a January report on consumer perceptions from the New York Fed found a general notion of pessimism has set in. Of those surveyed, some 15.4% of those said they were afraid of losing their job in a year, up 1 percentage point from the previous month. And the mean probability of even finding a job in the first place is down from the last survey. As with concerns about self-preservation in the midst of a global health scare, economic fear is contagious and negativity breeds negativity. As such, the market is dealing not with a supply issue but one of demand.

The week kicks off with data on new home sales in the United States, followed by durable goods orders on Tuesday. With pessimism growing, pay attention to a reading on consumer sentiment in the US market as well. Wednesday brings the usual focus on EIA data, but the bigger market impact will come from the rate decision from the US Fed. European data are out in spades on Thursday. But not to be outdone, the US also releases data on GDP on Thursday. With a focus on the possibility of slowing US shale output, Friday’s rig count may be in fashion, though we do get a late-week reading on China’s manufacturing PMI. Canadian and European GDP figures wrap up the week. With no shortage of volatility in store, expect at least an Orange-level swing in Brent, with the benchmark moving by at least plus or minus 3% on the week.