The GERM Report

Risk level: ORANGE

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

THE BOOSTER SHOT

-America is burning.

-Crude oil price volatility is ebbing, for now.

America is burning. The death of 46-year-old George Floyd, ostensibly at the hands of a Minnesota police officer, ignited rage among the country’s African-American population about mistreatment from state law enforcement personnel. But it also seems to have released pent up anger among everyday Americans frustrated by a litany of grievances, from extended quarantines to hyperpartisan politics. For the market, the implosion comes as trade tensions rekindle concerns about the durability of the shaky trade agreement brokered in January between the United States and China. The political volatility in the United States, meanwhile, has diminished investor confidence just as the forward structure for oil was showing the early signs of smoothing. Already on its heels, the unrest could stifle the expected economic revival.

The extreme swings in the price of oil are over for now and the shrinking contango structure shows an oil market on the verge of overflowing is balancing out. The price for Brent crude oil is stuck now at around $35 per barrel, though May brought one of the strongest rallies in the commodity’s history. The global benchmark ended last week up just 0.5%, however, to finish trading for the month at $35.33 per barrel.

“The direct economic impact of the protests is small, at least so far.”

That was the word from Mark Zandi, chief economist at Moody’s Analytics as state’s National Guard members take to the streets to enforce order across major cities from Chicago to Los Angeles. Protesters, some allegedly infiltrated by extremist groups, have burned and looted metropolitan areas big and small. The unrest has turned deadly, with at least a dozen casualties reported in Chicago alone during a decidedly violent weekend in America. Commenting on equities, Daiju Aoki, the regional chief at UBS Securities in Tokyo, told Reuters that, with US elections around the corner, the unrest has a political as well as economic toll.

“It is becoming more difficult to see U.S. markets rallying further from here, but at the same time we don’t expect a big decline, so the S&P 500 could be rangebound.”

That could be the same for crude oil prices. The price for Brent crude oil gained 14% during the first full trading week of May, though the benchmark leveled out last week for a gain of just a half percent.

The unrest in the United States could delay the reopening of the world’s largest economy. Already, US GDP is in negative territory for the first quarter. The Federal Reserve Bank of Atlanta on Friday revised its estimate for second quarter GDP from negative 40.4% to a staggering negative 51.2% after blows to personal incomes and personal spending. The crimped demand comes as OPEC works to offset the glut that emerged during the first half of the year. Saudi Arabia, which needs oil priced at around $80 per barrel, is jockeying for a long extension of the 9.7 million barrels per day in voluntary restraints. Russia, which said its benchmark Urals is already above expectations, is again balking on long-term tightening. Parties to the curtailment agreement may move their regular meeting up from next week to June 4, giving US political unrest another day or so to distract the market with negativity.

This is the first global health scare as well as the first real American uprising in the modern media age. The disorder, both in terms of the economy and the general mood, have been driven in part by social media. The pace at which feeds crawl on Twitter and other platforms in and of itself invites volatility because of the tendency to provoke knee-jerk reactions, not only on the trading floor but in the public space. Facebook was three years away from its introduction to the public at the time of the SARS epidemic in 2003, and Myspace still had another five years left in its reign as the world’s largest social networking site. Twitter would not be launched for another three years. More than 50 years ago, the Canadian media scholar Marshall McLuhan observed that we shape the tools to communicate and those tools in term shape us. With computers a nascent technology at the time of his thesis, McLuhan had the foresight to see that binary code would alter our relationship not only with time but space as well, and by extension, reality.

One of McLuhan’s contemporaries, Harold Innis, felt that changes in how we communicate ran parallel to changes in the global order. When media forms change, so does leadership. By his thinking, those who control knowledge have the power to define reality, a particularly astute point in the Trump era. In this era, negativity breeds negativity and the mood is spilling over into segments of the broader economy.

And it is here that the discussion returns to the fear index behind commodities. Crude oil prices were relatively consistent in the latter years of the 1970s, just as the Middle East was on the cusp of upheaval from the Iran-Iraq war and later the Islamic Revolution. That revolution, like today’s US sanctions, wiped millions of barrels per day from the global market. One of the strongest historical tailwinds for the price of oil, the surprise 1981 Israeli airstrike on Iraqi nuclear facilities, helped crude oil prices double from late 1970s levels by 1981. Those levels would hold, relatively speaking, until the mid-1980s, when a glut emerged to spoil the rally. Since then, we have seen the price of oil swing from $100 per barrel, to below zero for WTI and back to the current range of around $35 per barrel. That volatility, to some degree is indicative of a changing media landscape, akin to the observation from Innis that empires rise and fall along media trajectories. With real-time information come real-time reactions, and that volatility is now amplified by real-world violence.

But the modern media landscape has also diminished our collective attention spans. Oil market watchers may be already focusing their attention on the upcoming OPEC+ meetings, as the number of obligatory sources close to the group’s thinking speaking to media outlets today suggests. Indices such as US manufacturing and vehicle sales may take a backseat to media coverage of social unrest on Monday. Tuesday brings with it the customary US inventory data from the American Petroleum Institute, along with a reading of Australian GPD. The reading Wednesday of GDP for Switzerland, on the path to reopening, could be a bellwether of sorts for the broader continental economy. If the rumor mill is correct, the market will by then have digested its fair share of OPEC+ sources and be fully invested on what happens in Vienna. US inventory data on Wednesday will fuel the fire. Should OPEC+ drop the hot potato, watch for the price of oil to drop heavily. Jobless claims in the United States and German factory orders round out the week. Technical indicators for the price of oil suggest volatility is fading. An Orange alert is in place, with Brent moving by around plus or minus 3% on the week.