Risk level: Orange
RED: Severe (+/- 4%) ORANGE: High (+/- 3%) YELLOW: Elevated (+/- 2%) BLUE: Guarded (+/- 1%)
THE BOOSTER SHOT
-After OPEC+, Russia sees a geopolitical opening.
-Pleas to support globalization continue.
The price for Brent crude oil fell more than 2% for the week ending June 26 as an uptick in coronavirus infections raised doubts over the prospects for a swift economic recovery. With the rise in new cases threatening economic reopenings, the International Monetary Fund last week lowered its forecast for global growth nearly 2% from its April estimate to negative 4.9% in 2020. While downbeat economic forecasts are nothing new this year, the market seems to be finally coming to grips with reality. But beneath the noise of global COVID-19 cases and social upheaval is the quiet march of sovereign ambition. Russia, one of the architects of the recovery in crude oil prices, has been slowly advancing well beyond its traditional sphere of influence. With a firm grip on the economic spigot that is crude oil, Russia has an opportunity to gain a global upper hand.
After rising from the ashes of single-digit prices in April, Brent has shown an incredible rally for much of the second quarter, mirroring the performance of equities markets on the global stage. An increase in US crude oil inventory levels and a damning report from the IMF, however, put the global benchmark at a loss. Brent closed the week ending June 26 down 1.9% to $40.93 per barrel.
While US President Donald Trump continues to face harsh criticism for the national response to the coronavirus, his health and human services secretary, Alex Azar, told CNN’s “State of the Union” during the weekend the “window is closing” on the opportunity for a serious response. An increase in testing and social awareness, he argued, were helpful, however. Elsewhere, China quarantined some half a million people in Axin county, about 90 miles from Beijing, to contain new outbreaks of viral infections. While the US grapples with social controls and adopting masks, the lockdown in China means only one person per household per day can leave for supplies.
Where lockdowns are required, the IMF said in its report last week that economic policymakers should ensure households have “sizeable, well-targeted support” to balance any loss of income. That measure is up for debate in the United States, though lawmakers have hinted that another round of stimulus could come in July. Globally, the IMF said that “strong multilateral cooperation remains essential on multiple fronts.”
That plea likely falls on deaf ears amid the rise in nationalist and populist political trends. Top advisors in the White House, for example, continue to push the unproven narrative that China exported the coronavirus to the United States, part of a coordinated effort to demonize the Asian giant on xenophobic grounds. On economic terms, two of the world’s leading economies remain on a war footing. The Trump White House, however, has been soft on one of its most steadfast adversaries; Russia.
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. That grab for market share is in part a battle against US shale. The shale boom helped catapult the United States to the top tier of the global oil market, particularly after US President Barack Obama lifted a moratorium on crude oil exports in 2014. Reporting from Russian news agency RT at the time noted that global oil prices crashed some 50% by the middle of that year, settling at its lowest level since 2008 when the end to the moratorium was announced. Now, even with OPEC+ restraint supporting the price of oil, the Russian Central Bank acknowledged “the situation requires a considerable additional easing of monetary policy.”
On the geopolitical playing field, however, Russia has pulled off a coup. Its seat as a non-member-state overseer of compliance with OPEC+ restraint gives it a unique hold over the global economy. Russia, according to the IMF, should see growth slip from 1.3% to negative 6.6% this year. That mirrors the expected collapse of 6.8% for Saudi Arabia, but is far less painful than the 8% decline expected in the United States. With fewer social and political distractions, meanwhile, Russia has been playing its hand better than its adversaries. Weekend reporting from The New York Times alleges the Kremlin, through its military proxies, had placed bounties on the heads of US and NATO forces fighting in Afghanistan. The reporting also suggests the Trump administration knew about it, but did nothing. Talking heads and pundits spent most of the weekend bashing the president for overlooking his own intelligence reports, and recall that Trump at a 2018 meeting in Helsinki opted to believe Russian President Putin over his own advisors. That narrative lines up well with the notion that Trump is somehow a Russian asset, though Juan Cole, a regional expert teaching at the University of Michigan, offers a different spin. Russia, he said, could be trying to force the hand of the president. The threat against US forces could be a ploy to get them to stay. By keeping a troop presence, the US military in Afghanistan could do the grunt work in thwarting the advance of the Islamic State in Central Asia. Russia, as history has shown, cannot do Afghanistan alone.
Elsewhere and Russia continues to place pawns on the Mediterranean chessboard. Russia has already realized its ambition of extending its reach across the Balkans to reach the Mediterranean shore via Syria. Not content with influence on just one shore, Russia has quietly expanded its influence to Libya. Last week, the Libyan National Oil Corp. expressed profound concern that Russian mercenaries were on the ground at the giant Sharara oil field. Russia has long supported rogue Libyan Field Marshall Khalifa Hafter, who himself was believed to be a US intelligence asset. Haftar has been on the back foot in his campaign to control Libya by a military offensive staged from the east of the country, where a rival government is seated. With Haftar in retreat, its left to Russian mercenaries to have a go.
Libyan port access is concentrated in the east of the country at cities such as Benghazi, Ras Lanuf and Sirte. But in many ways, the Sharara oil field in the west of the country is the prize. Production there has been as high as 300,000 barrels per day, roughly a third of Libya’s total potential capacity. Winston Churchill at the dawn of the 20th century linked oil to geopolitics when he shifted the navy away from coal power. At the height of the Cold War, US President Jimmy Carter pinned oil to national security after he saw Russian intervention in Afghanistan as a threat to US allies, and producers, in the Middle East. Writing on the US foreign policy doctrine of containing Russian expansion, as envisioned by US diplomat George Kennan, Melvyn P. Leffler, a former Wilson Center public policy scholar and the Edward R. Stettinius professor of history in the department of history at the University of Virginia, wrote that the post-World War II arena was not a war-time concern.
“Because the principal threat was not a military one, scarce resources would be needed to expedite Europe’s reconstruction, to thwart a Soviet-German coalition, and to cage the Russian bear within traditional Russian border,” he wrote.
With the international arena undergoing profound systemic change, and some 75 years after the end of the second world war, the Russian bear has finally broken free.
In other matters, the British economy on Monday was expected to show a 1.6% contraction for the first quarter, well before the impact of the coronavirus was fully realized. A flash reading of inflation in June for the euro area is expected to show a slight decline. Consumer confidence in a United States facing a real uptick in coronavirus infections is out on Tuesday. On Wednesday, Germany is expected to show a slight rise in unemployment, to around 6.6%. In the United States, mortgage applications should show a decline. Providing a lift, however, would be the reading of US manufacturing PMI, which continues to march closer to the 50 mark separating growth from contraction. And overshadowing the weekly readings from the US Energy Information Administration will the minutes from latest meeting of the US Federal Reserve. With quarantines in limbo, watch for late-week readings of unemployment from Italy and Spain. And trading may end in a whimper as holiday-goers clock off early for Canada Day and US Independence Day. Given the prospects for a light trading week, an Orange alert is in place, with Brent expected to move by about plus or minus 3% on the week.