The GERM Report

Risk level: RED

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

THE BOOSTER SHOT

• The oil price war will resolve who’s in charge.
• Sources familiar with particular thinking will drive the market this week.

The Brent crude oil market is coming off an extraordinarily volatile week, with the Trump administration driving hope that at least one segment of the global economy could be saved. His claim that production cuts upwards of 15 million barrels per day drove oil up some 21% on Thursday. US lawmakers, meanwhile, were busy last week contemplating how to punish Saudi Arabia for the lack of respect. By White House estimates, the US government is bankrolling Saudi defense capabilities. In return for the favor, Riyadh is leaving the US shale sector as collateral damage in a price war with the Kremlin. Most of the world’s major oil producers seem to favor some sort of coordinated effort to prop the industry up with higher crude oil prices. At issue is who goes first. The first power to blink will indicate which power is in charge, but likely not in the way you think.

Brent crude oil prices slumped 20% during the week ending March 20. Last week, the benchmark ended up 37% and most of that came on Thursday after Trump suggested there may be an agreement among global producers to trim output. That volatility should continue this week as the rumor mill turns to sources familiar with the topic du jour to get an understanding of what happens next among OPEC and other major players.

The obligatory “sources familiar with the matter” told the Reuters news agency on Sunday that Riyadh was holding off on issuing its Official Selling Price until the end of the week, when OPEC+ members meet to discuss how to manage a market where demand is evaporating. According to Amena Bakr at the Energy Intelligence group, Saudi Arabia is looking to broker a deal to cut some 10 million bpd from the market, though how that’s distributed is unclear. If the cuts are that deep, it would require widespread coordination, possibly extending beyond the core group of producers. Bakr states the Kremlin may head to the virtual conference room with preconditions that will be tough to overcome. Nevertheless, there are indications that big producers are willing to play ball. In the United States, the world’s largest crude oil producer, some players in the Texas shale patch are looking to artificially stem production, though opponents of the measure say they should let the free market take care of itself.

In Washington, Trump during the weekend met with oil executives and lawmakers from oil-producing states to weigh the issue. US Sen. Ted Cruz, R-Texas, said the US oil sector was in the midst of a “perfect storm,” where demand destruction from the viral pandemic is compounded by the market impact of a price war between Russia and Saudi Arabia. Oil is getting cheaper and major corporations are running out of money. In the US oil sector, North Dakota producer Whiting Petroleum became the first casualty of the war when it declared bankruptcy last week. US lawmakers are already seeing their constituents lose their jobs by the millions and many of those are in well-paying industries like energy. For Sen. Dan Sullivan, R-Alaska, energy is a national security issue, where stability in areas such as the Middle East can make or break a rally. That perception is based in part on the Carter Doctrine, which put military dominance over the Strait of Hormuz at the front and center of national security issues in the Cold War. During the Carter administration, the threat to Middle East security came from Soviet ambitions in Afghanistan. Forty years later and, according to some lawmakers, the threat is from Saudi Arabia.

“You’re a long-standing ally of ours,” Sullivan said during the White House meeting. And right now, “you’re hurting a lot of our citizens.”

Sullivan and Sen. Keven Cramer, R-N.D., introduced legislation in late March that called on Saudi Arabia to change course or risk US military support. By Cramer’s read, the Trump administration has steered the US energy sector from renaissance to security to dominance.

“That dominance and that security right now are in some danger,” he said.

Writing in the 1980s, Jack S. Levy at Columbia University noted that great wars such as World War II resolve the question of who’s in charge. In general systems theory of international relations, the geopolitical arena has been defined by the ebb and flow of the struggle for power between the dominant and the ascendant players. While skirmishes such as the US invasion of Iraq may shape regimes, it’s only these great wars that reshape the international order. In the oil sector, the OPEC price war may be one of those defining conflicts that determine who is in charge. As was the case in World War II, Levy notes, bids for hegemony rarely end in hegemony. Germany tried, but failed, to become the hegemonic power and the great war reshaped an international system that left the United States in charge. US senators believe the shale sector, combined with a vast military, is the tool for global oil hegemony. With no levers apart from the free market at it’s disposal, however, the control rests with others. Success breeds emulation because players in any system must do what works or fall by the wayside. With calls from Texas for artificial controls over production, US leaders have revealed who’s in charge.

The rumor mill surrounding OPEC+ will keep the price of oil bouncing for most of the week, though pessimism is entrenched. Not even an attack on US oil operations in Iraq could lift the price of oil on Monday. Manufacturing data is adding to the malaise, with Germany moving further away from the 50 mark separating growth from contraction. On Wednesday, the US Fed releases minutes from its March 15 meeting, but also pay attention to Japanese bankruptcies filed last month. The big day is Thursday, when OPEC ministers discuss cut allocations for some 10 million bpd. Friday may bring in the new OSP from Saudi Arabia and a new gauge of consumer prices in the United States. With no light at the end of the tunnel yet, we remain in Red territory, with Brent moving by at least plus or minus 4% on the week.