The Geopolitical Energy and Risk Monitoring ReportTags: Economy, geopoliticOIL, geopolitics, OPEC, Russia, Trump
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: Orange
RED: Severe (+/- 4%) ORANGE: High (+/- 2%) YELLOW: Elevated (+/- 1%) BLUE: Guarded (+/- ½%)
THE BOOSTER SHOT
- Russia banking influence with OPEC role.
- Expect a particularly vocal Trump this week.
- Warning signs continue to flash on the economic dashboard.
A tariff bluff from US President Donald Trump helped stoke fears of a general economic downturn, though the threat quickly faded by the weekend. Warning signs continue to flash red, however, with US jobs data coming in at the worst in years. Speaking from the G20 meeting in Japan, IMF Managing Director Christine Lagarde, meanwhile, warned that the main threat to the global economy was trade tensions, tacitly suggesting it was Trump’s preferred use of tariffs as a diplomatic weapon that was making the road ahead particularly bumpy. With US crude oil flowing in spades, it was Igor Sechin, the CEO of Russian oil producer Rosneft, who said the Trump administration was also using energy as a weapon. With Russian oil exports hobbled by contamination issues in the Druzbha pipeline, and Urals making a regular appearance in the United States, how that weaponization plays out in OPEC+ circles is of paramount importance in the coming weeks.
Markets recovered somewhat on word the Trump administration would hold off on progressive tariffs on Mexican goods following a series of bilateral talks in Washington DC. In Europe, the German manufacturing sector continues to show signs of contraction, while US manufacturers added the fewest jobs since Trump took office. The week in oil prices ended on a high note, with Brent jumping 2.6 percent on Friday. On the week, the price for the global benchmark ended about 2.7 percent higher, just out of earshot of the Orange alert issued June 3.
US House Speaker Nancy Pelosi last week described the US jobs report as “disturbing,” accusing the Trump administration’s economic policy advisors of following a “special interest agenda.” In the US agricultural sector, meanwhile, sustained flooding and collapsing sentiment over US-Chinese trade tensions means confidence has all-but disappeared. Pelosi and House Democrats, meanwhile, aim to introduce American voters to more details from the Mueller report, hoping to counter the administration’s assertion that the president was cleared in the multi-year investigation. US Rep. Adam Schiff, D-Calif., the chairman of the House Intelligence Committee, said the evidence in the Mueller report is “both criminal and non-criminal.” The investigation found that Moscow had tampered with the US democratic process in Trump’s favor, though the campaign team did not deliberately collaborate. Mueller found several cases of obstruction of justice, though a sitting president cannot be indicted. House hearings on the Mueller investigation are scheduled throughout next week.
While at loggerheads diplomatically, Russia is something of an energy partner for the United States. More of the Russian barrels of medium-sour Urals grade are finding their way to the United States. In PADDs 1 and 3, imports of Urals through May are up nearly 40 percent from all of last year and 170 percent higher than all of 2016.
Russia’s ability to deliver Urals, meanwhile, is hampered by contamination issues in the Druzhba pipeline system. About 1.5 million barrels per day of Russian crude oil were impacted when high levels of organic chlorides were detected in the pipeline system, forcing operators to close both sides of the 3,400-mile network. When refined, organic chlorides turn into hydrochloric acid, which can wreak havoc on refineries. Last week, French supermajor Total declared force majeure over jet fuel at its Leuna refinery in Germany, citing the contamination issue as the culprit. Russian Energy Minister Alexander Novak said at an economic forum on Friday the issue will be resolved soon, though Russian oil output is already close to three-year lows. US oil production, meanwhile, continues to set records and US crude oil exports continue to move into Europe, close to Russia’s sphere of influence. Rosneft CEO Igor Sechin, one of President Putin’s closest allies, said US sanctions, and even threats of US sanctions, were a burden on the global economy. On US oil and natural gas, which has also found its way to Europe, Sechin said the United States is using “energy as a political weapon.”
The contamination issue and the need to prop up its economy with oil revenue means Russia needs to work hard to protect a market share during a time when signs point to softening ahead. It has been said many times in these pages that the Cold War is alive and well and running through a pipeline somewhere in Eastern Europe. Washington has labelled its liquefied natural gas as “freedom gas,” tying the US energy sector to diplomacy overseas, all while dismantling the liberal trade relations that would bolster the US advantage. A Russian seat at the OPEC table, meanwhile, gives the Kremlin a unique position to control the flow of oil on a global scale. Russian Central Bank Gov. Elvira Nabiullina in March warned there was a high risk that oil production would exceed demand this year and Saudi Oil Minister Khalid al-Falih has said OPEC+ curtailment would likely roll over to avoid a glut. That, however, would constrain Russia at a time when its national interests are colliding repeatedly with the United States. The Kremlin may find itself between a rock and a hard place with oil streams. Aligning with OPEC+ gives it a soft power it would not otherwise enjoy, but it would put market share and revenue at risk. As the Druzhba contamination issue drags on, and with more US oil showing up along the Russian belt of influence, where the Kremlin sits with OPEC+ will be indicative of its strategic priorities in the second half of the year.
The House hearings on the Mueller probe are likely to be a source of irritation for President Trump, so expect some volatility this week should the president frequent the Twitter bully pulpit. It is also a trifecta week, with the EIA, IEA and OPEC all expected to weigh in on current conditions in their respective market reports. Great Britain on Monday publishes data on both GDP and y-o-y industrial production for April. With the tariff threat eliminated for now, a reading Tuesday of Mexico’s industrial production may be a factor to watch. US consumer prices for May are out on Wednesday along with hourly earnings. The week ends with the University of Michigan’s reading of consumer sentiment for June. Given the EIA, IEA and OPEC reports, and post-tariff enthusiasm, another Orange alert is in place, with the price for Brent expected to move by plus or minus 2 percent on the week.
About The Author
Matt is a Director of Commodity Research at ClipperData. Matt specializes in extracting key themes from technical and fundamental analysis of the global energy market, and communicating these through daily and weekly deliverables. He also provides oil and natural gas analysis and commentary to national and international media outlets that include CNBC, Fox Business, Russia 24, the Wall Street Journal, MarketWatch, AFP, Bloomberg, Reuters, and the Oil Daily. Prior to joining ClipperData, he worked for eight years at Schneider Electric / Summit Energy as a Global Commodity Analyst, where he also founded and authored the blog, Energy Burrito. He started his career at the Royal Bank of Canada in the UK, spending eight years with the bank. During that time, he managed $55 million in assets as a portfolio manager and financial analyst.