The GERM Report

Risk Level: BLUE

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

THE BOOSTER SHOT

-The UAE pivot is destabilizing

-Energy and geopolitics collide

The Emirati government last week stated that it’s new relationship with Israel was a step toward regional peace. The United Arab Emirates would become only the third Arab nation to normalize relations with Israel, and the first nation to do so from the Persian Gulf region. Hailed by the power brokers involved as a step forward for the Palestinians, the arrangement actually may be destabilizing to the region. Iran, the archenemy of Israel, warned that it would create a “dangerous future.” The Turkish government called it a disgrace. With Turkey flexing its muscles in the Mediterranean and with Iran growing ever belligerent, rising tensions could destabilize shipping lanes and some of the largest oil and gas reserves in the world.

The price of Brent crude oil was influenced by retail sales figures, a drain on US crude oil inventories and deep recessionary strains. The pluses and minuses, however, more or less evened out, leaving the global benchmark for the price of oil stalled. While up some 8% since early July, Brent has been unable to break through the $45 per barrel ceiling, gaining just 0.9% during the week ending Aug. 14 to finish trading Friday at $44.80 per barrel.

The Emirati government stated that its decision to normalize relations with Israel was made on the contingency that annexation of Palestinian territory would end.

“This decisive freeze on the annexation of Palestinian territories is a significant diplomatic achievement and comes in furtherance of the UAE’s belief that establishing normal relations with Israel will enable it to play a direct and constructive role in enhancing the region’s security and stability.” Emirati Foreign Minister Anwar Gargash said in a statement.

It may get just the opposite. The terms of the arrangement were violated from the start, with Israeli Prime Minister Benjamin Netanyahu standing pat on his territorial ambitions, saying it was US President Donald Trump who requested a “temporary halt” to the Israeli land grab. If annexation plans continue, Netanyahu said he would not broker with his new Arab ally, but only “in full coordination with the U.S. administration.”

The Emirati government seemingly had no response to Netanyahu’s balk, moving forward with bilateral exchanges with Israel on the pandemic. The Israeli pivot, however, widened chasms in the Middle East and elsewhere rather than bridged over differences. The Kuwaiti government stated that its stance on Israel was unchanged, adding it would be the last country to normalize relations with Israel. Kuwait’s deputy foreign minister, meanwhile, quickly dialed up his Iranian counterpart. Relatively silent on the diplomatic tilt, the Qatari government is seemingly no friend of the Emirates, lashing out at the UAE for cyber-meddling in its official Qatari News Agency. The head of the Turkish parliament condemned the Emirati government for its decision. Finally, Iran said the UAE made a huge mistake, warning the Emirati government it was facing a “dangerous future.”

Iran and Qatar share claims to the South Pars/North Dome gas condensate field, the largest natural gas field in the world. The United Arab Emirates shares maritime borders with Qatar and Iran, and its port at Fujairah is one of the busiest in the gulf region. In May last year, four ships, including two from Saudi Arabia, were ostensibly targeted by Iran or Iranian-backed agents at the busy port. Occurring on a weekend, the blasts at the Port of Fujairah did little to move the needle on the price of oil, but was a prelude to bigger events. A month later, the Iranian military shot down a US drone flying near the area. Brent shot up some 4% in response, and there were real concerns about open warfare between the United States and Iran. And in July, the Iranian military seized the Stena Impero, a British-owned oil tanker, in the Persian Gulf. Iran has shown that its military and its proxies are capable of lashing out at their foes, and the Emirati tilt through that lens is destabilizing.

Iranian proxies in Lebanon, meanwhile, are likely to lash out given the dual pressures of political chaos in Beirut and growing Israeli ambitions, both in the geopolitical arena and in the energy sector. The acquisition by US supermajor Chevron of Noble Energy last month was heralded in the Israeli press as a huge victory. Through the deal, Chevron gains entrance to the giant Leviathan gas field off Israel, which the Time of Israel equated to Chevron’s role in the Ghawar oil field in Saudi Arabia and the massive Gorgon liquefied natural gas field off Australia. When tensions erupted in the region in 2006, Hezbollah forces took to the water to stake their claims to territory in the Mediterranean. While disputed maritime territory is relatively small, the oil and gas potential there is huge. And it’s situated squarely in the middle of a hot spot for violence, particularly now when muscle-flexing is abundant.

And speaking of muscle-flexing, Turkey is likely to exploit its geopolitical position as a bridge between Asian, Middle East and European power centers. Turkey has stubborn claims to parts of the Mediterranean as well, and its waters closer to home serve as an important energy link to Europe. Turkish ambitions in Libya, meanwhile, could easily led to a proxy war with Russia, as both powers look to play kingmaker in the North African oil producer. In Greece, European leaders warned that Ankara’s determination to drill for oil and gas offshore heightened the risk “of dangerous incidents.” While territorially, Turkey is detached from the UAE, it’s growing influence in the Mediterranean could spell trouble for Israel should the poles of alignment consolidate in us-and-them fashion in the Middle East.

Crude oil prices were drifting lower early Monday after Japan posted a record-breaking 27.8% economic contraction in the second quarter for the third-straight quarter of decline. New home starts in the United States could provide a good indication of what’s in store for the second half. Tuesday brings a data dump of inflation, with metrics coming in from Canada, the euro zone and Indonesia. The big fireworks come Wednesday, though, when members of a committee monitoring OPEC compliance meet and data on commercial crude oil inventories in the US market are released. Another drain in US oil stocks will almost certainly send the price of oil higher. Norway and the Philippines announce their rate decisions on Thursday, and we get another look at jobs data in the United States. The week ends with composite PMIs for the continental economies in Europe. Competing economic trends in the world will likely keep the price of oil relatively steady this week, moving in the Blue range of around plus or minus 1 $ on the week for Brent.