The GERM Report

Risk level: Red

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

THE BOOSTER SHOT

-Thomas Hobbes was right.

-Oil remains a strategic interest.

Iranian authorities during the weekend said they understood the cause of an explosion at the Natanz nuclear research facility, but were withholding information as a security precaution. An unknown group called “Cheetahs of the Homeland” took credit for the attack, though fingers have been pointed at Israel and the rogue exile group, Mujahedin-e Khalq. In Iraq, meanwhile, Shiite militias tacitly answering to Iranian security forces continue to run rampant as the new government in Baghdad spins its wheels. Iran has already shown its willingness to flex its muscles. Without a regional power to oversee lingering hostilities, one of the world’s most strategic waterways could be exposed to risk. With even Tehran worried about security in the Persian Gulf, the risk may be too severe to ignore. And yet …

Trade levels were thinned out by the long holiday weekend in the United States. The price for Brent crude oil edged up 4.3% for the week ending July 3 to finish at $42.80 per barrel. The rally was supported by evidence of tight OPEC+ discipline and improvements in US hiring, though many of the positive data points were rear-view images.

A series of explosions have been associated with Iranian missile and nuclear facilities, raising suspicion that a third-party actor may be engaged in a covert campaign against the Islamic republic. Keyvan Khosravi, a spokesperson for Iran’s Supreme National Security Council, said a structure at the Natanz nuclear research facility was damaged by an explosion. The government was investigating “different hypotheses,” but had settled on a determination.

“Due to some security considerations, the cause and manner of this incident will be announced at a proper time,” he was quoted as saying.

Israel would be the first name on the list of likely culprits, though reaching the Natanz facility from offshore would be difficult. A cyberattack such as the Stuxnet virus that crippled Iranian nuclear installations in 2010 is not out of the question. Adding to the mix is a claim from an unknown group calling itself the “Cheetahs of the Homeland” that it was behind the incident. In a letter to the BBC’s Persian service, the group claimed to be part of an “underground opposition with Iran’s security apparatus”. The Associated Press, meanwhile, noted the group used language in its message similar to that used by the opposition Mujahedin-e Khalq, which has well-established connections in Washington DC. The MeK has ties to a Paris-based group that called itself the Iranian Parliament in exile. Though largely targeting Iranian government officials, its killing of American contractors in Tehran in the 1970s, participation alongside Saddam Hussein’s forces in suppressing Kurdish and Shiite rebellions in Iraq in 1991 and its later attacks on Iranian embassies in 1992 earned it a spot on the terrorist lists of several nations. But no more. Several reports indicate the group has spent lavishly on its diplomatic efforts at securing a mindset warm to regime change in Iran. Thousands of MeK dollars have found their way into the pocketbooks of everyone for US President Trump’s personal lawyer, Rudy Giuliani, to former national security advisor John Bolton, who does little to hide his appetite for war with Iran.

Outside pressure on Iran from a group that’s been advocating for regime change for decades comes as Tehran faces crippling economic pressure from the United States. And gone are the days diplomatic constraint from the joint nuclear agreement heralded by former US President Barack Obama as ending a nuclear threat in the Persian Gulf region. Backed into a corner, the Iranian military has engaged in a tacit campaign of disruption in neighboring Iraq, seizing the opportunity to exploit the political weakness in a post-Saddam Baghdad. At home, Iranian hardliners have summoned President Hassan Rouhani, a moderate, in a possible move toward impeachment.

Iran still manages to produce oil at a relatively stable rate of some 2 million barrels per day or so, though that’s down from Obama-era levels of around 3.5 million bpd. Largely isolated from the international market because of US sanctions, Iran has other means of influence. Brent crude oil jumped 14% in a single session after brazen drone and missile attacks on Saudi Aramco facilities in mid-September. The attack disrupted 5% of the world’s oil supply and prompted US Secretary of State Mike Pompeo to accuse Iran of an “act of war.”

That, however, was not a red line for Washington, which under President Trump has tried to disengage from previous international obligations. Persian Gulf oil has been a strategic interest for Western powers since at least the admiralty of Winston Churchill. Oil from regional producers in the aftermath of World War II supported recovery in Europe and Japan. Soviet expansion during the Cold War, meanwhile, meant the US was strategically obligated to fortify the region and the US invasion of Iraq in 2003 showed that strategic interest was deeply embedded in Washington doctrine.

That, however, was before the advent of a leaderless multipolar world. The rise of populist leaders in the Americas, as well as the British departure from the European Union, show international interests are waning. Management fatigue since the 1940s has forced political leaders to look inward, leaving the window-cleaning to others. The absence of top-level managers in the global arena opens to the door to adventurism in places such as Syria, Iraq and Libya and the regional lines of allegiance show like a battle map of World War II.

While the coronavirus pandemic has facilitated a transition to clean energy, oil remains a crucial commodity for the global economy. Recognizing the threat, Iran has even suggested it would shift its export efforts away from the Persian Gulf to the Gulf of Oman. In the absence of a global manager to keep the peace, the situation may become even more unmanageable. Remarking on an unmanaged world, Thomas Hobbes observed more than 350 years ago that life under that condition would be “nasty, brutish and short.”

Market players on Monday will be watching for a string of manufacturing data from the United States, though vehicle sales from June could serve as a better economic barometer. European production figures are out on Tuesday and they could paint something of a global snapshot of pandemic recovery. Wednesday brings a trove of data, from economic sentiment in Japan to year-on-year inflation in Russia. It’s another round of US jobless claims on Thursday. The week ends with the latest monthly market report from the International Energy Agency. A Red alert is in place, with Brent moving by at least plus or minus 4% on the week.