The GERM Report

-Brent rallies despite demand concerns.

-Tensions in the Persian Gulf are escalating.  

Crude oil prices broke out of pattern in bullish fashion early Tuesday, triggered by the looming threat of Hurricane Sally, though demand remains a real concern. Brent crude oil came under pressure on Monday after British energy company BP dared to suggest the “p” word on crude oil demand. Elsewhere, signs of a gradual recovery in the European economy are emerging, though the same can’t be said for the Brits as they churn the waters that will separate it from the continent. And let’s not forget about all those extra barrels that OPEC+ needs to assess later this week. In the geopolitical arena, The GERM Report has been warning the consolidation of an anti-Iranian bloc would upset Tehran, and now it looks as if the Islamic republic is rattling its sabers at the United States.

Chart direction for West Texas Intermediate broke out of the symmetrical triangle that would indicate a pivot point early in the trading day. Brent followed suit after positive demand signals from Europe and Asia, working still to defend the $40 per barrel mark. The global benchmark for the price of oil, Brent, was up some 0.98% as of 8 a.m. ET to hit $40.00 per barrel on the button.

Hurricane Sally looks to make landfall as a Category 2 storm at some point on Tuesday. Unconfirmed reports, but from reliable sources, stated that Shell started trimming production Monday from its refinery in Norco, La., and Phillips 66 was looking to do the same at its 255,000-barrel-per-day Alliance refinery on the state’s Gulf Coast. BP had already evacuated non-essential staff from two offshore platforms by Monday. According to the Bureau of Safety and Environmental Performance, about 21% of total oil production and 25% of total gas production in the US waters of the Gulf of Mexico are offline. Some of that still could be the result of Hurricane Laura, which charted a similar path as Sally in late August. This almost certainly adds to the bullish sentiment Tuesday, but with the energy-rich PADD 3 region still dealing with a Laura hangover, it could make reading US inventory reports an exercise in sorcery.

A green initiative papered by British supermajor BP suggested an era of strong oil demand is over as major economies look to leave fossil fuels behind. We’ve been here before, however, on forecasts that peak demand is behind us. Forecasting trends over the horizon is something of a fool’s errand, though it does resonate well with the financial press. In the more immediate term, the Organization of Petroleum Exporting Countries revised its forecast for global demand in 2020 lower by 400,000 bpd to average 90.2 million bpd. OPEC also lowered its forecast for 2021, citing uncertainties about the stubbornness of the pandemic. The International Energy Agency, as is customary, played it both ways. The pandemic for the IEA means demand was revised lower by 100,000 bpd for the third quarter and 600,000 bpd for the fourth quarter. Next year, however, the growing appetite in China means demand could grow by as much as 5.5 million bpd. But in usual IEA fashion, analysts added a caveat that India, tight in the grips of COVID-19, may be a drag on demand. That supports our theory that volatility is in play, but don’t expect a huge breakout or breakdown.

The United States continues to deteriorate on political, social and health grounds, with the nation struggling to contain the pandemic as students return to in-person learning. The continental economy in Europe, however, is showing signs of life. Economic sentiment, as shown by the ZEW barometer, came in better than expected in Germany and in the broader European economy. But continuing with the theme of tit-for-tat news on the economy, a choppy Brexit spells trouble for any hopes for a free-trade agreement with continental Europe. Hiring in the British economy took a turn for the worse and economist say growth will be limited. But the European Union can expect to be spared from most of the damage.

In the Middle East and Central Asia, The Soufan Center, run by former FBI agent Ali Soufan, finds the Arab members of the Gulf Cooperation Council – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates – are severely strained by the pandemic.

“The global economic weakness caused by the pandemic has exposed the inability of the GCC states, to date, to adequately diversify their economies,” its latest report read. “All of the GCC states have sought to diversify by promoting tourism, financial services, some light industry, and even agriculture, but energy exports still provide a majority of their government revenues and large percentages of their gross domestic product.”

Some of the GCC members, namely Saudi Arabia and Qatar, already lowered their official selling price for oil for October loadings, hoping to capitalize on bargain hunters. That’s despite an apparent glut on the market that emerged after parties to the OPEC+ group relaxed on constraint last month. Some of the GCC members too have joined an emerging bloc of Iranian opposition in the region by warming up to Israel, at the behest of the United States. The clear demarcation of friend and foe in the region is sure to invite adventurism from either the emboldened power, in this case Israel, or a threatened Iran. Iranian government spokesperson Ali Rabiyee strongly denied reports that Iranian agents were plotting to assassinate US envoy to South Africa Lana Marks in retaliation for the killing of Iranian Gen. Qassem Soleimani at the hands of the US military in January. In response to a threat from US President Donald Trump that the United States would respond to that with a force “1,000 times greater in magnitude,” the spokesperson warned the United States was playing with fire. Given the volatility of a US president headed for a possible defeat, playing with fire may be a campaign move. Voters are unlikely to switch gears if the economy is doing well, and it’s not. Voters are also unlikely to want change in times of war, and with Trump’s base leaning decidedly pro-Israel, we can expect more saber-rattling in the Persian Gulf up to November.