Risk level: RED
RED: Severe (+/- 4%) ORANGE: High (+/- 3%) YELLOW: Elevated (+/- 2%) BLUE: Guarded (+/- 1%)
THE BOOSTER SHOT
-As oil goes, so goes the world.
-Antsy consumers driving demand higher.
Winston Churchill as First Lord of the Admiralty in the early part of the 20th century bonded oil to geopolitics through a modernization effort that shifted the Royal Navy from coal-fired steamships to oil. Franklin Roosevelt saddled US interests on Saudi oil during a secret meeting in 1945 onboard the USS Quincy in the Suez Canal. Since then, energy security and national security have become inextricably linked. Since then, governments have tried, and usually failed, to break the link to oil in more ways than one. Iran, where Western and sovereign Islamic interests collide, is testing US patience with a fuel delivery to Venezuela, a stubborn Western adversary at the center of national security doctrines. Saudi Arabia, an oil puppet master, is targeting the US energy sector with millions of barrels of oil. Putting the pieces of oil politics back in the box has been a vexing problem for at least a century and will remain so for the foreseeable future.
Data showing a rebound in road traffic and signs that global isolation rules are easing gave the oil market a boost last week. The price for Brent crude oil shot up nearly 5% last week to end trading Friday at $32.50 per barrel. So far, a solid floor of $30 per barrel seems reasonable, though recessionary strains and higher consumer fuel prices could upend the rally.
With demand destruction biting hard, Chinese refineries processed about 12.3 million barrels of oil per day over the first four months of the year. Now past the infection peak, Chinese refineries processed about 13 million barrels of oil last month, an 11% increase from March and nearly 1% higher than April 2019. In the United States, both products supplied to the market and gasoline imports into PADD 1, a benchmark of sorts for national demand, saw increases over the last week. Manufacturing activity is slowly coming back to life, with some industrial centers in the United States expected to go on a hiring spree, albeit for temporary labor. All of that adds up to a strong surge in the price of oil, with Brent up 28% for the month through Friday.
Brent is the global benchmark for the price of oil as well as a symbol of economic and national security. That gives it a unique place in global affairs as movements in either direction can force a state’s hand in a way that few other things can. US President Donald Trump proved that point by both admonishing and praising OPEC during various times of his tenure. It was an Art-of-the-Deal moment for the president when he was credited with brokering an end to a damaging price war between Russia and Saudi Arabia. From the North Sea to the shale patch in the United States, severe oscillations in the energy market are unsettling both in security and economic terms. But a long-distance view shows general trends remain.
Churchill started a geopolitical addiction to oil in the early 20th century with a shift away from the coal-fired steam engine. That put British trajectory on path toward an interventionist policy in the Middle East and Central Asia, and expanded London’s global reach with greater and faster mobility. Insistence that the Anglo-Persian Oil Company remain a British entity played out over the ensuing decades to put the West on a crash course with destiny in the Middle East. Later, US President Franklin Roosevelt’s worries that Saudi oil would fall into British hands led in part to a secret meeting onboard a Navy cruiser in the Suez. Those interests remain, even with the growth of North Sea production and the rise of US shale. In geopolitical terms, diplomatic ties, pipeline and vessel deliveries run parallel to strategic interests.
And so it is with the pending arrival of some 50 million barrels of Saudi crude oil on the water waiting for space in the US stockpile. Concerns that commercial storage in the United States helped push the price for West Texas Intermediate into negative territory last month, bringing with it energy companies struggling under the quarantine economy. US leaders representing oil-producing states cried foul over the Russia-Saudi spat, arguing Riyadh was not behaving as a friend. The Saudi armada may be the kingdom’s response. Elsewhere, Iran is trying to send fuel to Venezuela, testing US resolve over maintaining dominance in its own backyard.
Demand destruction and extraordinarily low crude oil prices has prompted some energy companies to push the accelerator on cleaner fuels. Oil, however, will remain a central component of the global economy. That makes oil a geopolitical resource as well. Looking into the future, the adage remains. The Cold War, or at least some version of it, is alive and well and running through an oil pipeline somewhere near you.
Data out already on Monday showed the Japanese economy, among the largest in the world, has slipped into recession. In Libya, forces loyal to a UN-backed government in Tripoli managed to make gains against a rival forces from the oil-dominant east of the country. If peace holds, Libyan production could rebound and threaten global storage levels. We’ll get an idea of consumer recovery on Tuesday when Europe issues data on new car registrations. We’ll also get a sense of OPEC+ resiliency when Russia issues its latest reading on GDP. Euro area inflation readings come out on Wednesday, as do figures for US inventories. With US Fed officials sounding alarms, the release of minutes from the economic overseers will be telling. Thursday brings unemployment numbers in the US economy and a gauge of manufacturing activity. The week ends with monetary policy decisions from the European Union. The Red alert remains in place, though extreme volatility may be easing. Expect Brent to move by at least +/- 4% this week.
The GERM Report 