The GERM Report

Risk level: Orange

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

THE BOOSTER SHOT

-The United States is Crafting its Own Geopolitical Decline.

-Oil pipelines are as good as territorial boundaries.

It read in part like the motto from the US Postal Service; demand warnings from neither the IEA, OPEC or BP stay the price of oil from the completion of a stunning rally. There were few signs last week that demand was improving globally, particularly amid concerns of a second wave of infections on the European continent. Storm activity in the Gulf of Mexico and yet-another drain on commercial crude oil in the US market did, however, put wind in the sails of commodities last week. For the much-awaited meeting of OPEC+, the core members were left with little ammo apart from scolding the producers churning out more than they should. Looking ahead, with few significant economic data coming up, it may be geopolitical affairs, particularly centered around the United States, that move the needle this week.

We’ve had a few chart patterns that suggested a breakout was imminent for the price of oil. Even with British supermajor BP stealing the headlines by hinting at The End of Oil, the price of Brent rallied in remarkable fashion to finish the week up 8.3%, off our charts, to end trading Friday at $43.15 per barrel. A quick glance at Brent, though, finds it may be put to the test at $44 per barrel.

We could see some fireworks at this week’s UN General Assembly, particularly given the peace narrative surrounding the US-led Arab pivot toward Israel. Some sectors of the international press openly ridiculed so-called Middle East experts for doubting the ability of the United States to broker deals that favor Israel. The largely Sunni tilt toward a country that’s arguably one of the more contentious ones in the Arab and Persian world is certainly a breakthrough, though we contend the issue does less for peace than support it. Arab favors from the US Defense Department could add another layer of tension. The Palestinian cause, meanwhile, looks dead on arrival.

We referenced international relations theory last week, noting that the consolidation of a clearly-demarcated pole of influence in any capacity is certain to invoke a counter-response. Stephen Walt, now with Harvard University’s John F. Kennedy School of Government, described this as balancing and bandwagoning behavior. States either hop on the bandwagon of ascendant themes, in this case Israel, or balance by warming to the opposing power, in this case Iran. Before the United Arab Emirates and Bahrain normalized their relations with Israel, the lines in the sand were less clear. Now, Iran and its supporters are backed into a corner, though patience has prevailed so far. And it may be more clash of civilizations and less end of history, as international divisions among Shiites and Sunnis in the countries in question become problematic. And let’s not ignore the not-so-stellar record on human rights for many under the Sunni-Israel umbrella. And recall that an attack by a Shiite power, Iran, against a Sunni country, Saudi Arabia, in September last year caused the price for Brent to jump some 14% in a single session.

A surprising balancer is the European Union. We can expect representatives from the US government to deliver in some capacity a decidedly anti-Iranian narrative during this week’s online meeting of the UN General Assembly. The sentiment will certainly be echoed by delegates from Israel. Whether there will be less-than-veiled statements referencing a US-led unraveling of the liberal order remains to be seen. That said, the European Union has started signaling that, in matters of peace, the United States is an isolated power, and not splendidly so. With Washington looking to tighten the sanctions noose further on Iran, the European powers more or less said that it’s not up to the US government. In a weekend statement, Josep Borrell, the EU’s special envoy for the Iranian nuclear agreement, said that because the United States pulled out of the agreement in unilateral fashion, it can’t use it to justify sanctions.

“The (Joint Comprehensive Plan of Action) remains a key pillar of the global non-proliferation architecture, contributing to regional and global security as it addresses Iran’s nuclear program in a comprehensive manner,” he said. “I call on all to do their utmost to preserve the agreement and to refrain from any action that could be perceived as an escalation in the current situation.”

The agreement may be flawed in some aspects, but diplomacy is never perfect. The agreement as it stood before Donald Trump came to power in the United States gave Iran less reason for belligerence. As inked, it was a testament to the placating effect of the liberal world order. In the era of Trumpian nationalism, however, the webs of interconnectivity, to borrow from storied political scientists Robert Keohane and Joseph Nye, are dissolving and loosening the ties that would otherwise constrain rogue behavior. Rogue behavior is what brought US power over the horizon and out of isolation in the 1940s. By the 1970s, containing rogue behavior by way of influence over oil in the Middle East, particularly the Persian Gulf, became enshrined in US foreign policy. Under Trump, the focus on domestic revival has left the superpower looking for others to handle the long wars, savoring easy rhetorical victories instead.

Seeking to free up its own options, Iran has suggested it could start exporting oil not from the Persian Gulf, but from the Gulf of Oman, avoiding the tense Strait of Hormuz. Seeking to avoid transit fees and regional threats, Israel, meanwhile, wants to see a pipeline coming from Saudi Arabia to the Mediterranean. That plan calls for the extension of the Eilat-Ashkelon pipeline and gives the Saudis a way to avoid maritime risks that endanger the flow of oil.

A pipeline does several things. It can be seen as a tacit demarcation of control. We see that playing out in Europe with the vast network of Russian pipelines traversing the fringe of the traditional belt of Soviet influence. An Israeli-Saudi pipeline too would be something of a line in the sand. Pipelines like these, through friendly territory, are also less prone to the risk of sending carriers near Iranian and Yemeni waters. Pipelines don’t pay transit fees and they aren’t concerned with freight rates. Pipelines are also less prone to causing major environmental disasters. Not one of the 10 largest oil spills in modern history have come from a pipeline. And the extension of the Eilat-Ashkelon pipeline brings with it Arab support, firming up the regional bloc in the form of durable infrastructure. For better or worse, a pipeline from Saudi Arabia to Israel would release some of the US military’s obligations to the region, ceding that control to others. Written by the great Zbigniew Brzezinski, US President Jimmy Carter in his 1980 State of the Union address stated that the Persian Gulf region was unequivocally US turf.

“An attempt by any outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States of America, and such an assault will be repelled by any means necessary, including military force,” he stated.

With the United States relying less on foreign oil to satisfy its demand, the Carter Doctrine is losing clout. And with Trump looking to disengage from what he sees as unnecessary wars, his administration may see the Arab pivot to Israel as a way out. Pipelines, meanwhile, are the lines in the sand that demarcate territorial influence. They carry with them soft power by way of necessary commodities. Trustees at the Center for Strategic and International Studies wrote that the United States needs to build its soft power in the international arena if it’s to remain an influential global actor. We’ve written before that the Cold War is alive and well and running through pipelines in and around the European continent. With no pipelines of its own, and even Iran looking to avoid the Persian Gulf, we need to take a closer look at the strategic posture of the United States in the Middle East. 

Robert Kaplan, the head of the Federal Reserve Bank of Dallas, started the week off by noting that smart fiscal policy was no match for the coronavirus. Without additional federal support, something that’s not even worth spilling ink over, full recovery (which means comparing the situation to year-ago not month-ago levels) will remain elusive. With out much else going on Monday, it will be all Fed all day. We’ll get a look at how nationalism is playing out in the Americas when the Central Bank of Brazil releases meeting minutes on Tuesday. And don’t forget the lessons from the Great Recession when combing over housing data from the US economy. We get a gauge of the mood in the European economy Wednesday through a reading of consumer confidence in Germany. And, of course, there’s data on commercial crude oil and petroleum product inventories to asses. It’s a pretty slow week from Wednesday, though there’s always the obligatory jobs report and such. There will be lots of chatter over US Federal Reserve policy, but for oil, it looks like mostly geopolitical and wonky technical factors that will drive prices this week. Right now, it looks like Brent has no appetite for $44 per barrel so we may see some erasers on last week’s bounce. Look for Brent to move, likely lower, by around 3% on the week, an Orange alert in The GERM Report’s scale.