The GERM Report

-Why Bother with Earnings Guidance?

-Exxon’s earnings are emblematic of US troubles.

Crude oil prices had recovered some of the ground lost in a Thursday session clouded by a severe contraction in the US economy. That situation will only become worse unless US lawmakers trade in partisan sniping for representing their respective constituents on pandemic relief measures. Meanwhile, the European economy is performing far better than the US economy, though it’s a relative success given that bloc-wide GDP shrank some 12% sequentially. Outside of the tech-heavy Nasdaq, there are few indicators of optimism. US machinery giant Caterpillar didn’t even bother with forward guidance in its latest financial report. Against that economic chaos is a sharp resurgence in geopolitical tensions, with the US president questioning even the most basic tenets of US politics and policy. Faith in what were once givens before the pandemic is fading quickly. In many ways, the United States is burning down.

The price for Brent crude oil was up by about a half percent to trade at $43.48 per barrel as of 8 a.m. ET. The global benchmark was in retreat in the previous session on the political and economic chaos in the United States. European indices offered little support, though commodities could be seeing some report from storm activity in the Atlantic.

Vandana Hari, founder and CEO of Vanda Insights, in a note emailed to The GERM Report stated that the weak US dollar, a darling of the Trump administration, is providing some support to crude oil prices, though the coming flood of OPEC crude will likely be a spoiler. Her team sees Brent stuck in a range of around $43 per barrel, increasing perhaps to $45 by October, though the US political climate continues to lend uncertainty to futures forecasting.

The second quarter report from US supermajor Exxon Mobil was emblematic of the state of economic affairs in the United States. The company reported early Friday that it suffered a second-quarter loss of $1.1 billion, its sharpest contraction ever.

“The global pandemic and oversupply conditions significantly impacted our second quarter financial results with lower prices, margins, and sales volumes,” Chairman and CEO Darrin Woods said in a statement.

Not to be outdone, rival US powerhouse Chevron reported an $8.3 billion loss in the second quarter and revised its forecast for commodity prices lower. The lower-for-longer mantra indoctrinated by former BP CEO Bob Dudley has evolved into lower-forever, though $100 oil is the clear outlier, not $50 per barrel. Nevertheless, Chevron warned that pressure from the viral pandemic was unprecedented, adding it was expecting continued losses in the third quarter. Heavy-machine builder Caterpillar, meanwhile, reported sales and revenue were down 31% from the first quarter, noting the uncertain times meant it wasn’t even going to bother with guidance on the rest of the year.

The US economic and political climate makes global climate change look like a light sprinkle. Overseas, and most of the continental economies are seeing contraction, but nowhere as severe in the deep 32.9% dive reported in the United States, its deepest retreat since 1947. The economy for countries that use the euro currency contracted by a collective 12.1% sequentially. Like the United States, the Portuguese economy also contracted by its worst ever, though that was only by 14.1% in the second quarter. The Spanish economy contracted by 18.5% from the first quarter and Italy saw a 17.3% retreat, though that was better than the forecast of 18.7%.

The economic decline in Europe provides something of a backdrop for upheavals in the global order, as well as the obvious impacts on demand for oil and natural gas. For the second quarter, economists at the Organization of Petroleum Exporting Countries stated that natural gas prices were up in Europe, though that was partly due to a slump in imports of liquefied natural gas. That puts a wrench in the gears of US energy policy, which sees LNG as part of a Russian containment strategy of sorts. US President Trump, who on Thursday made an unprecedented suggestion to delay the November election, took to Twitter to question why Germany was paying “billions of dollars” a year for Russian natural gas.

The European continent can expect an influx of Russia gas with the twinning of the Nord Stream natural gas pipeline through the Baltic Sea to German. The first leg of the pipeline was heralded as a victory as it circumvented the Soviet-era networks that run through a troubled Ukraine. With Trump pursuing a policy of energy dominance, the Nord Stream pipeline now looks like a threat to US interests. But instead of pushing for incentives, the president is now embracing a policy of retreat. How, the president asks, can the United States keep Germany under its protective umbrella when its spending heavily on Russian energy products. In response, Trump announced that “we are therefore moving some troops out of Germany.”

Apart from threats to US democracy itself, his posture reverses generations of US accomplishments in the liberal world order. After the German defeat in World War II, the United States infused its economic, and to some extent political, systems in Europe by rebuilding the continental economy by way of the Marshall Plan. Diminishing the military posture in Germany almost certainly provides an opening for Russia, and even China, to advance its interests in Europe. With Trump seemingly headed for defeat in the November contest, this administration looks intent on burning the place down before its term expires.