The GERM Report

-WTO sees possible L-shaped recovery.

-There’s no shortage of geopolitical risk.

Crude oil prices were lower early in the trading day on Wednesday after estimates showed a mixed bag for inventories of petroleum products in the United States. A steady series of drains on US crude oil inventories suggest that demand is slowly returning to the world’s largest economy, though trade issues and all-encompassing polarization could be impediments to future growth. Global trade, meanwhile, is on the rebound, but there’s little chance of a V-shaped recovery. And there’s no shortage of geopolitical risk factors, from unrest on the African continent to simmering trouble on the Soviet fringe, that could influence the price of oil.

The price for Brent crude oil was inching steadily lower early Wednesday. A mixed report on inventories from the American Petroleum Institute and signs of renewed trade tensions between China and the United States are dragging the global benchmark down. Brent was trading at $44.09 per barrel as of 8 a.m. ET, down some 0.8% from the previous close.

The American Petroleum Institute on Tuesday reported that total US crude oil inventories fell by some 4.3 million barrels during the week ending Aug. 14. The consistency of the draws on US crude oil levels suggests a rebound in demand, though gasoline inventories told another story. Gasoline inventories swelled by about 5 million barrels on the week.

Demand levels will be reviewed by parties to the committee monitoring compliance among the handful of oil producers joining OPEC in voluntary curtailments. Curtailments eased from 9.7 million barrels per day to 7.7 million bpd in July and compliance has been strong. The Argus media group had the early scoop on ministerial thinking before the virtual roundtable began. An internal report reviewed by Argus finds OPEC is just as uncertain as everyone else, noting the “fragility of the market and large uncertainties, particularly associated with oil demand.” And along with everyone else, the group expressed concern about the possibilities of a prolonged pandemic.

The World Trade Organization, meanwhile, found there were indications of a global economic recovery, but it will be slow. Its trade barometer recorded its lowest reading since 2007, and was more or less equal to the financial crisis of the middle aughts. Indices for automotive products and air freight were heavily impacted by the pandemic. Mimicking gains seen in the tech-heavy NASDAQ, however, the WTO said its index for electronic goods was among those showing only slight declines.

“Additional indicators point to partial upticks in world trade and output in the third quarter, but the strength of any such recovery remains highly uncertain: an L-shaped, rather than V-shaped, trajectory cannot be ruled out,” the WTO’s report read.

The fragility of the global economy suggests the price of oil will remain stuck where it is, though geopolitical issues could add a bit of a risk premium. OPEC math could be complicated by potential developments in Libya. Argus again comes through with the goods by reporting militias operating in the east of the country may allow stored oil to leave ports. Dueling claims of authority in Libya have rekindled long-standing ambitions not only inside the divided country, but from the likes of Turkey and Russia, who have legacy interests in gaining influence in the Mediterranean region. It’s yet unclear what the Libyan development means in terms of production and export volumes, and Libya’s National Oil Corp., which is based in the west of the country, has yet to lift force majeure declarations on exports.

Any breakthrough, however, will be fragile. Libya is a global battleground of sorts, and trouble elsewhere on the African continent could easily spill over. The Malian government fell on Tuesday after the president and prime minister were arrested by the military on concerns of a cheated election. That’s drawn the interest of many of the same global players jockeying for position in Libya. Elsewhere on the African continent, Nigeria has seen a spike in activity from Islamic militants. Fighters loyal to the so-called Islamic State group reportedly took hundreds of hostages at a town in north Nigeria close to the Lake Chad region. Given the overlapping and transnational nature of the battles underway in Africa, the unrest there could rekindle the hot coals still simmering from the Arab Spring in the early part of the last decade.

In Europe, German energy company Wintershall is again drawing a line in the sand on US interests in the regional gas market. The rise of US shale natural gas and subsequent US exports of liquefied natural gas means the Russian gas pipeline Nord Stream now poses a threat to US national security interests. The company’s CEO, Mario Mehren, told the Reuters news agency that US sanctions on the project were an unwelcome intervention.

“We have seen that the project has been brought into a broader geopolitical framework that is threatening a number of industries and parties involved” he said. “We reject these as does the German government and the European Commission and a number of European countries.”

Nord Stream avoids geopolitical sensitive territory in Ukraine, through which a series of Soviet-era pipelines carry Russian energy products to Europe. Ukraine’s troubled energy relationship with Moscow undermined European energy security in the past. There’s a risk that political instability in Belarus could emerge as a similar threat.