Lebanon Indeed has Potential

Risk level: Yellow

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

THE BOOSTER SHOT

-Lebanon is a battleground for regional influence.

-Expect fireworks, but not fires, on the US political stage.

The only real sign of optimism in the quarantine economy is China, which started inoculating its residents with an unproven vaccine for the novel coronavirus during the weekend. Auto sales in the world’s second-largest economy picked up recently and it appears oil is not alone in the bargain bin. In a sign that industrial activity is picking up, analysts expect Chinese imports of somewhat-cheap liquefied natural gas to jump some 10% from last year. Looking ahead, and barring any black-swan events, much of the focus will be on the United States, where top-party nominees square off for their first round of debates in the presidential election cycle. The political fireworks in the United States will likely overshadow events at the G20 in Saudi Arabia this week. But don’t ignore geopolitical issues. Lebanon’s prime minister-designate stepped down during the weekend. With the poles shifting quickly in the region, we anticipate a tumultuous future for the Levant and surrounding regions.

Apart from Monday, the price trends for Brent crude oil were flatlined last week. Trading levels showed the market seemed to find a band for the global benchmark in Goldilocks fashion, likely to the frustration of many investors looking for a breakout. But not even speeches from officials at the US Federal Reserve or the usual unemployment and US inventory data could move the needle much beyond last Monday’s sell-off. In the end, that Monday slump of around 4% was something the market couldn’t overcome. Brent finished the week down 2.85% to close trading Friday at $41.92 per barrel.

As expected, US President Donald Trump nominated conservative judge Amy Coney Barrett for a lifetime appointment to the nation’s highest court, a seat vacated by the recent death of long-time Justice Ruth Bader Ginsburg. Troubling or triumphant, depending on where one sits on the political spectrum, the nomination will be certain to play out in what’s expected to be a protracted legal fight on voting in what was the world’s greatest example of democracy. And it will be certain to be featured during Tuesday’s debate between incumbent Trump and his main challenger, storied senator and former Vice President Joe Biden. On energy, Trump has cast Biden as a foe of the fossil fuels industry, pouncing on early-year gaffes on a shale moratorium to convince the mainstream press that drilling would end almost immediately under a Biden presidency. But the bigger question won’t be drilling, but the Supreme Court. Not only would Barret, a Trump nominee to a lower court position, shift the court further to the right, and further away from the average pulse of the nation, but she could help decide the next election. That is unless Biden has a blowout victory.

Riyadh, meanwhile, is hosting energy ministers from members of the G20 this week. Saudi governance over the collective OPEC+ curtailments are unlikely to make the agenda. Instead, we expect Saudi representatives to hop on the bandwagon of greener shoots. Already, we’ve seen Big Oil companies putting a cleaner footprint forward. BP most famously went all in, declaring the end of oil in a recent policy brief. BP shares may be the bellwether on the trend in environmental utopia, however, falling steadily since mid-August to a 25-year low. We wonder if the green momentum is a result of stubbornly low oil prices. Some of the traders we’ve spoke with are bullish on oil long term, pointing to the lack of capital for drilling during the pandemic as a sign of supply-side shortages in the future. If the price of oil does indeed recover to the $60 or even $80 range, we wonder how likely it is that BP, Saudi Arabia or the rest of the crowd will remain committed to keeping barrels in the ground to counter the climate crisis.

Unlike many of its Arab allies, Saudi Arabia has yet to formally normalize ties with Israel, though it may be warming to the Jewish population. Wary of upsetting a citizenry already worried about the fading hopes for the Palestinian cause, Riyadh is unlikely to follow Bahrain and the United Arab Emirates by establishing a formal friendship with Israel. Ties are ties nevertheless. We wrote last week about proposals to establish infrastructure links between Israel and Saudi Arabia by way of alterations to the Eilat-Ashkelon pipeline, a bidirectional artery to the Red Sea.

Once upon a time, Iran was supplying oil to Israel and the pipeline was an essential element to energy security, providing a buffer against the Egyptian blockade of the Suez Canal in the 1950s. After the fall of the Pahlavi dynasty in Iran and the subsequent Islamic Revolution, things changed in the region and in the geopolitical circles of energy. The company in charge of the pipeline is on a bit of a branding kick, changing its name from the Eilat-Ashkelon Pipeline Company to the Europe-Asia Pipeline Company. Serving as a potential land bridge of sorts, a revised route could provide a buffer against maritime threats in the Persian Gulf and in the Red Sea. It would also draw a line in the sand that would contain Iran from upsetting the market by way of proxy or direct threats to shipping, muting one of Iran’s foreign policy cards.

Stuck in the middle is Lebanon. Lebanese Prime Minister-designate Mustapha Adib, a Sunni and former envoy to Berlin, stepped aside during the weekend citing the ever-present difficulties in moving forward under the country’s complex, and often corrupt, power-sharing arrangement. After an explosion of a cache of neglected ammonium nitrate at the port of Beirut left some 200 people dead and hundreds of thousands of Lebanese homeless, the French government moved to help with reforms in its former colonial arm. Facing an uphill fight, former Prime Minister Rafik Hariri said it was wrong to blame Paris for Lebanon’s current-day problems. President Michel Aoun, allied with Iranian-proxy Hezbollah on political grounds, took it a step further by warning the country would go to “hell” without a new government.

By design, Lebanon is a case study in international affairs. A complex power-sharing arrangement between Sunnis, Shiites and Maronite Christians makes it so internal bickering inhibits the rise of a state powerful enough to pose a threat in an otherwise tense region. Externally, however, Lebanon has long been on the colonial radar of rival powers jockeying for the upper hand in the broader Levant, the historical region in the Eastern Mediterranean that extends into the former Ottoman Empire. Considered a French protectorate, Lebanon also holds a significant place in US geopolitical history. Looking to fill a vacuum left by declining British and French influence in the late 1950s, US President Dwight Eisenhower saw Lebanon as a staging ground of sorts. In a message to Congress on the situation in the Middle East in 1957, Eisenhower laid the groundwork for what would eventually become the Carter Doctrine; a foreign policy focus that sought to put the Middle East squarely in the US sphere of influence. The Carter Doctrine was also a claim on regional oil, and Eisenhower’s actions could be seen in a similar light by way of the sensitive Suez Canal. Seeing Egypt as playing both sides of the Cold War conflict, Eisenhower eventually put boots on the ground in Lebanon to prevent the communist dominos from falling on the Middle East, and to deter Egypt’s growing influence.

Lately, it’s been up to French President Emmanuel Macron to try his hand at reforms, though recent US sanctions against Hezbollah sidelined one of the more influential political organizations on the Lebanese political scene. Rather than placate regional tensions, US foreign policy is actually stoking the fire by playing the field against Iran and its allies. Israel and Lebanon are at odds over their shared maritime borders, and given the geographical location, the southern Lebanese border is ostensibly controlled by Hezbollah’s forces. While limited in its maritime abilities, Hezbollah does boast a variant of the C-802 missile, where “sea-skimming” abilities make it a somewhat effective deterrent to Israeli advances offshore. During the 2006 war between Israel and Hezbollah, an attack by a C-802 on Israel’s Hanit left four Israeli sailors dead.

Israel in October is expected to hold talks with Lebanon over the simmering dispute over maritime borders. That has real ramifications for the oil and gas sector, particularly as Israel becomes emboldened by the so-called Arab pivot. Israel lays claim to some of the largest natural gas prizes in the Mediterranean Sea, with the massive Leviathan field as the case in point. Operated with the help of US-based Noble Energy, the consortium developing Leviathan estimate it holds about 60% of the total gas discovered offshore Israel to date, and there’s oil there too. Given Israel’s penchant for land grabs, we wonder what Israel wants offshore. In a breakthrough for a country that has long-standing energy ambitions, the Lebanese Petroleum Administration in May announced the completion of a deep-water well in its Block 4 basin. Already getting bids in 2017 from the likes of French supermajor Total, Italy’s Eni and Russia’s Novatek, offshore Lebanon holds promise. The gas potential could rival Israel’s, and there could be as much as 850 million barrels of oil offshore. Realizing that potential could help Lebanon overcome a near-insurmountable financial burden, though the ability to mitigate risk both internally and externally suggests Lebanon will remain in an uncomfortable state of limbo.

A boost in Chinese auto sales and improvements in the economic sentiment in the European economy were supportive of crude oil prices in early Monday trading. As of this writing, Brent looked to be testing $42 per barrel, though movements were minimal. Inflation in the German economy moved lower. In the United States, there’s no shortage of speeches on tap from Federal Reserve bosses, though it will be the revelation on President Trump’s tax returns and debates on Tuesday that will steal the headlines this week. Trade levels could be thin too given observations for Yom Kippur and other various autumn observations. Late Tuesday and early Wednesday bring the usual stuff from the API and the EIA, and there’s always the obligatory employment levels in the United States to monitor. We’ll get a glance at hiring in the European economy when Germany releases unemployment data Wednesday, and we should expect a bumpy rush to the end of the month too. The first of October brings a rate decision from the central bank in India, which has been hit hard by the pandemic. From Russia into the European Union, we’ll find out Thursday how well the various manufacturing centers are performing. The week ends with a flurry of activity from the European Central Bank and monthly payrolls in the United States. We were on point last week with an Orange alert, but see some decline in volatility. A Yellow alert is in place, with the price for Brent expected to move by plus or minus 2% on the week.


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