The GERM Report

-US-Chinese tensions cloud hopes for sharp economic recovery

-OPEC signals the end is near.

The price for Brent crude oil was up early Wednesday after unofficial US data showed a sizeable draw in crude oil inventories for the week ending July 10. The rally was supported in part by heightened Cold War-like tensions between the United States and China. But the rally might not last. Official US data on fuel and crude oil stockpiles could be a determining factor for trade momentum on Wednesday, while parties to OPEC+ curtailments are likely to ease back on restraint.

Brent was up some 1.1% as of 8 a.m. ET to trade at $43.39 per barrel. If the US Energy Information Administration confirms the draw, the tailwinds could push Brent to post-April highs. The urge to cash in, however, could prove the solution to higher oil prices is higher oil prices.

The American Petroleum Institute reported total US crude oil inventories dropped 8.3 million barrels for the week ending July 10, while gasoline inventories went down by 3.6 million barrels. Should the EIA confirm the draw later in the morning, crude oil prices will continue to rally. The futures structure, however, remains in contango, signaling an oversupply situation. The API reported storage levels at the inland storage hub at Cushing, Okla., the delivery point for US crude oil contracts, was up by a half million barrels, while distillates were up some 3 million barrels.

The desperate search for silver lining has provided a lift to crude oil prices for most of the second half of the year. Daily reports of positive vaccine tests are dominating the financial news headlines and influencing bullish positions, though the swell in US cases of coronavirus and a return to quarantine economies in other parts of the world suggest the optimism is overblown. The political climate in the United States, meanwhile, is increasingly toxic. Police in Michigan fatally shot a man after a stabbing incident [warning: graphic content] during an argument over the use of a face mask to contain the spread of the coronavirus. The mask has been a political badge of sorts, with ardent supporters of the US president calling the whole thing a hoax. The US Centers for Disease Control, however, said cloth masks are a first line of public defense.

The US example is reflected in economic data. The Federal Reserve Bank of Atlanta estimates second quarter GDP will shrink by some 35% in the second quarter. Banking giant Goldman Sachs in its latest earnings report said it expected US GDP to show a 4.6% contraction on the year before recovering to 5.8% growth next year. US federal stimulus, meanwhile, ends in a few short weeks, leaving many households without a steady stream of income in the quarantine economy.

In foreign policy, the United States and China continue to trade barbs over Beijing’s umbrella over the Asian economies. China has quietly been marching ahead with its Belt and Road Initiative, a Marshall Plan-like development project that would fold Central Asia into the Chinese system. In Iran, meanwhile, China reportedly signaled it was ready to spend $400 billion over the next 25 years, with more than half of that targeting Iran’s energy sector. In return, China could secure a regular supply of Iranian oil for a quarter century. Where the United States has torn up the nuclear agreement that could’ve brought Iran closer to the Western sphere, China senses an opportunity. And unlike the Cold War, where US foreign policy was focused almost exclusively on containing Russia, Washington has been unable to do much to deter China given the overlapping interconnections in the world.

Russia, meanwhile, is having its day at OPEC, advising parties to the multilateral curtailments that demand was enough to ease back on voluntary restraint. Russia has long been a reluctant participant, though its seat at the OPEC table gives it overwhelming influence in the global oil market. Easing back on curtailment, and the possible return of Libyan crude, could widen the gap on the contango structure, straining US crude oil production with lower oil prices. While China strikes against US interests in one side, Russia too could claim a win over the US oil patch. Phil Flynn at The Price Futures group, perched high above the floor of the Chicago Board of Trade, said in his Wednesday newsletter that there is “more evidence of falling US oil production.”