The GERM Report

-Optimism was misplaced

-Iran to shift oil away from Persian Gulf

Brent crude oil lost its grip on $40 per barrel after a damning economic assessment from the International Monetary Fund. What is set up to be three straight sessions of decline for the global benchmark indicates the early wave of optimism over the fight against coronavirus was misplaced. While much of the focus has been on US divisions and an uptick in new infections, it was the European economies that looked among the worst in the IMF report. US jobless claims, meanwhile, came in worse than expected. Elsewhere, Russia seems to be over with voluntary curtailments. And beneath the headlines are signs of new geopolitical tensions.

The recent flip into backwardation for the Brent trading structure was an anomaly that coincided with the expiration of monthly contracts last week. While a band of around $40 per barrel is likely, volatility can be expected given the turn in sentiment. Brent, back in contango, was trading down some 1.4% as of 8 a.m. to hit $39.76 per barrel.

Brent is down some 5% on the week and is on pace for three straight sessions of decline. If the trend holds, that would be the longest stretch of losses since a four-day stretch ending March 31. Allan Greenspan would be proud of the run in crude oil prices since then, with Brent jumping some 75%. That gain includes a stretch where the price for West Texas Intermediate went into negative territory on fears US storage tanks would overflow. Cheers over not-as-bad-as-expected economic news have overshadowed the reality that not-as-bad-as-expected is still bad. Supporting the market displacement was a tweet from the Bloomberg news agency that continuing US jobless claims were better than expected. That does nothing to offset the fact that all of the jobs gained since the Great Recession are gone. Many may never come back. The US Labor Department on Thursday reported first-time jobless claims for the week ending June 20 were 1.48 million, above the expectations for 1.3 million in new filings.

On Wednesday, the International Monetary Fund offered a forecast for global economic growth at negative 4.9%. That’s a 1.9% downward revision to its April forecast. While much of the news focus has been on dysfunction in the United States, the IMF reported that more than 90% of national economies are in recession. US GDP is expected to slip some 8% on the year, though the euro zone is looking to be the hardest hit. Manufacturing giant Germany is on pace for a 7.8% contraction, while France could see a 12.5% slip. Christopher Dembik, the head of macro analysis at Saxo Bank, added his voice to the chorus of those saying the market is disconnected from reality.

“The [IMF] report is a useful reminder that the crisis will be much deeper than what markets are assuming and that the scenario of a V-shaped recovery is not a done-deal considering the numerous downside risks to growth,” he said on Thursday.

For crude oil, the market focus has been centered largely on compliance with OPEC+ restraint. Laggards such as Iraq have committed to doing more than expected to catch up with past cheating. Storage levels, meanwhile, are no longer at the brim. Stock levels in Cushing, Okla., the delivery point of US crude, dropped by 991,000 barrels during the week ending June 19. But US demand looks to be on the decline, with gasoline storage levels increasing by 1.7 million barrels, compared with expectations for a decline of 1.3 million barrels. That may be indicative of renewed demand destruction in the United States due to the surge in coronavirus cases.

But the run toward $40 per barrel was enough for Russia to say nyet to further production restraint. A report from the Reuters news agency finds that state-controlled banks in Russia are offering $6 billion in loans to oil drillers to prepare for the eventual return of demand. While the Russian economy is under pressure, the Russian Central Bank said the price of oil is already within its budgetary expectations. Russia is one of the architects of OPEC+ constraint, but also quick to pounce on the opportunity to increase its market share.

And while much of the focus has been on economic news and, to be frank, US turmoil, there are signs of emerging geopolitical risk. With the United States clearly distracted by internal issues, rivals such as North Korea have turned to adventurism. In the Americas, Venezuela was in open defiance of US economic pressure by taking gasoline shipments and refinery parts from Iran. Iranian President Hassan Rouhani, for his part, said US sanctions were avoidable, announcing plans for three new petroleum projects. Among them may be a shift away from the Persian Gulf to the Gulf of Oman for crude oil exports, which would free Iran from the bottleneck behind the Strait of Hormuz.

“Our oil exports are no longer connected to the umbilical cord of the Strait of Hormuz,” the Iranian president said. “This is the first in Iran’s history.”

That could be seen as a strategic victory for the United States, which bases part of its foreign policy on influence over oil shipments through the region. Or it could be indicative of Iran’s agility, as the Islamic Republic may be better at maneuvering through economic pressure than any other country. And Tehran may be about to see an opportunity to expand its proxy influence across the Shiite Crescent. A dizzying economic decline in Lebanon has exacerbated political tensions in a divisive-by-design government. With tensions mounting, Lebanese President Michel Aoun warned of an “atmosphere of civil war.”