The GERM Report

-US pipeline woes curb potential for energy dominance

-Russia is concerned about a Joe Biden victory

The price for Brent crude oil remains stuck at around $40 per barrel as the abnormalities of the quarantine economy become the new normal. The apathetic price band comes even as the US government raised its estimate for Brent spot prices by some $4 per barrel for the second half of 2020. The expectation of an increase in crude oil prices was not enough, however, for an upward revision to US oil production. Elsewhere, however, there are signs that OPEC+ restraint will ease and Libyan production will rebound. With buyers still on the hunt for cheap oil, adventurism along Cold War geopolitical boundaries may increase ahead of the US general election.

The volatility in the price of oil has eased in the early part of July as a sort of economic complacency sets in. Even with an upward revision to the price of oil, Brent only managed to post a gain of 0.4% as of 8 a.m. ET to trade at $43.24 per barrel.

The US Energy Information Administration in its latest monthly forecast raised its estimate for Brent to $50 per barrel for the second half of the year, up $4 per barrel from its previous guess. The EIA’s upward revision was prompted by signs of depleting oil inventories. That estimate did little for tailwinds in the spot market in early Wednesday trading. After a massive 8.2 million barrel draw in the prior week, the American Petroleum Institute reported that US crude oil inventories increased by 2 million barrels last week. The EIA is expected to report a 3.1 million barrel draw later today and a big miss on either side will determine the direction of the rally.

US data is important not only because the country has one of the most transparent economies in the world, but also because of its economic might. The rise in US shale oil production, meanwhile, catapulted the country to the top of the heap in terms of global oil producers. The EIA, however, lowered its production forecast for 2020 by some 600,000 bpd and by 1.2 million for next year, relative to 2019, citing a WTI price that’s been unable to break into the $50 level. The dip below zero in April for US crude oil prices was a disruptive anomaly that eventually prompted pricing agencies S&P Global Platts and Argus Media to introduce a benchmark based on US Gulf Coast deliveries rather than from Cushing, the delivery point in Oklahoma for WTI. Based on an inland delivery point, WTI is something of a land-locked benchmark that some argue has few parallels in the global, waterborne market.

Lower US crude oil prices are not only providing headwinds for production, but also inhibiting the midstream sector. In the gas market, consultant firm Wood Mackenzie reported that the “perfect storm” of lower demand, increased costs and legal challenges prompted Dominion Energy and Duke Energy to give up on a gas line in the PADD 1 district. For oil, despite US President Trump’s ambitions for energy dominance, environmentalist and other opposition groups have won their day in court. A federal judge on Monday ordered the closure of the controversial Dakota Access pipeline, saying the environmental review of the project was inadequate. The US Supreme Court the same day blocked further construction of the Keystone XL pipeline on similar grounds. According to the headline from the Reuters news agency, the blow to the US midstream sector could mark “the end of an era.”

That poses a challenge for potential buyers of US crude. European refiners are moving from sour to sweet to take advantage of the discounts for some traded grades. Urals, the Russian benchmark, is enjoying a bit of a premium over Brent, squeezing an already-down-on-its-luck refining sector even further. That prompted European buyers to look for cheaper oil such as light-sweet US crude to plug the gap. In its status report from last week, however, the EIA reported a four-week moving average of 2.8 million bpd in exports, down by a half a million bpd from the same time last year. With US pipeline projects facing obstacles, some European buyers may have to look elsewhere for cheap crude. Libya on Wednesday announced it was lifting force majeure on its Es Sider port, opening the prospects for the resumption of exports for one of Africa’s largest producers. Middle East players, meanwhile, may be dropping hints first laid by Russia; that OPEC+ discipline will conclude at the end of July.

Developments in Libya, meanwhile, are indicative of the emerging geopolitical gamesmanship developing beneath the din of the pandemic. Libya’s National Oil Corporation expressed alarm recently after Russian mercenaries deployed at the giant El Sharara oil field in the west of the country. Russia’s expansive tendencies have been put on display during much of the Trump presidency, with the Kremlin eager to advance on long-standing interests beyond the Balkans and elsewhere. Russia has already pulled off a coup of sorts in the global economy with its influential seat at the OPEC+ table. Russian economists said Wednesday, however, they were concerned that a Trump defeat in the November elections in the United States could spell trouble for Russian economy. Vladimir Evstifeev, the head of analytics at Russia’s Zenith Bank, told the Tass news agency the possibility of increased sanctions from a Joe Biden presidency would be damning, with the ruble weakening by as much as 15%.

“The weakening of the ruble traditionally spurs inflation and will continue to negatively affect such components of GDP as final consumption and investment,” he said.

President Trump was impeached amid investigations that Russia helped secure his election. The White House described the investigations as part of a broader hoax.