-Geopolitical risk mounts a comeback.
-US “reopen” movements exposes risk of politicizing crises.
Politicizing a crisis is indicative of a lack of genuine leadership and it often results in unintended blowback. This is true in the case of the coronavirus and the oil markets. Right-leaning leaders that represent oil-producing states in the US spent much of March and April threatening to withhold military support from Saudi Arabia unless the kingdom moved to prop up the price of oil. The Trump administration is now threatening some sort of blockade on Saudi crude as it continues with its protectionist policies. And the scapegoating is contagious, with Australia joining in on the critique that the World Health Organization is somehow ideologically skewed. Unable to overcome mass quarantines, the situation has evolved in a way that exposes the market to growing geopolitical risk.
Crude oil prices are pulling themselves out of the chasm of negativity. The price for Brent crude oil was up about 7.5% as of 8 a.m. ET to trade at $21.89 per barrel, following a 5.4% gain in the previous session. The rally came despite demand disintegration, evaporating storage and rising unemployment. One reason for the rally may be geopolitical.
More than 4 million Americans filed for unemployment for the week ending April 17, showing the deep contraction in the world’s biggest economy. US economic managers are expecting to see GDP go into negative territory soon and there are few signs that doors will be opening in April. Even the US president, openly frustrated with the pace of recovery, has stated that some state governors he supports are relaxing quarantine restrictions too soon. In Michigan, where the state governor is a frequent target of Trump’s anger, protestors are planning to head to the state capital to demonstrate against restrictions. The “reopen” movement is spreading across much of the Midwest, with rallies also planned in Wisconsin. Protests, however, are endangering the social distancing that some experts say may be necessary to flatten the curve, with the World Health Organization warning that a too-soon mentality will lead to more deaths in an already strained health system.
Where that pressure leads in economic terms is the great unknown, though recovery will happen. What’s on the other side, however, is anyone’s guess. The fear of the unknown opens the door to a shifting mentality where, when nothing else seems to work, leaders turn to scapegoating to deflect the blame. Once a nation starts to deplete its resources, political or otherwise, it must ensnare the resources of others in order to continue carrying the burden of leadership, or it must reduce its commitments. History shows that dominant powers generally try, but fail, to do either of those things effectively or safely. When management burdens overwhelm or when efforts to support dominance fail, leaders and their supporters turn to scapegoating and blame the very political relationships that supported leadership in the first place. That explains the xenophobic reactions to the World Health Organization and the US shift in its relationship with Saudi Arabia.
Some 40 million barrels of oil from Saudi Arabia are on their way to PADD 3 in the US south at a time when storage capacity is at a premium. Washington, already spinning its wheels in efforts to support the US oil sector, is pondering either tariffs or blockades on Saudi crude oil shipments. That, however, could leave those tankers with no option but to leave empty, further isolating US crude oil in the domestic market at a time when Cushing is close to capacity. With no place to go, US crude prices will only sink further.
On the flip side, world leaders are seeing an opportunity to kick their adversaries when they’re down. China has taken a particularly aggressive stance against Taiwan, which Beijing claims as its sovereign right. It bears repeating then; Once a nation starts to deplete its resources, political or otherwise, it must ensnare the resources of others in order to continue carrying the burden of leadership, or it must reduce its commitments. History shows that dominant powers generally try, but fail, to do either of those things effectively or safely.
For the United States, President Trump on Wednesday took to Twitter to announce that any Iranian aggression against US forces in the Persian Gulf would be met with a military response. Though vessel traffic is impacted by demand destruction, the Persian Gulf remains a vital artery for the flow of a good chunk of the world’s oil. Islamic Revolutionary Guard Corps commander General Hossein Salami on Thursday responded to Trump’s threat by saying the feeling was mutual.
“If any vessel or any military unit of the terrorist forces of America seek to put the security of any of our military or non-military vessels in danger, that unit or vessel will be targeted,” Islamic Revolutionary Guard Corps commander General Hossein Salami warned on Thursday.
When prospects of a good economy falter and threaten the support for world leaders in a time of crisis, those leaders may turn to conflict as an alternative as few constituents will dare risking patriotism when national security is at stake. With a penchant to use scapegoating and xenophobia as a tool of blame deflection, geopolitical issues could mount as the pandemic continues. With PMI readings in an exponential decline and with the world’s biggest oil companies flirting with red territory, global tensions may explain some of the recovery in oil on Thursday.