The GERM Report

-Stimulus or not, Trump wins

-Crude oil prices rally in break-out fashion  

Crude oil prices rebounded after yesterday’s sell off as Hurricane Delta zeroed in on the production and refining centers in and around the Gulf of Mexico. Labor issues in Norway, meanwhile, threaten to close one of the country’s premier oil fields. We’re still waiting to see details from OPEC’s annual outlook, but Morgan Stanley is already providing clues about the future. Some market sectors are betting on a US stimulus package of some sort, but we see that as political blather more than anything. On the election in general, we do see trouble ahead. On the other side of the Atlantic, meanwhile, the warnings about a messy British divorce from Europe continue and we’re just now seeing the unintended consequences of the so-called Arab Pivot play out.

Brent crude oil is on pace to post major gains on the week if the trend continues. On the week, the price for the global benchmark for the price of oil is already up some 9%, but much of that growth is on temporary factors such as storm activity in the Gulf of Mexico and President Trump’s health. Brent was up some 1.7% as of 8 a.m. ET to hit $42.72 per barrel. Chart patterns suggest Brent is in a bit of a breakout, but we wonder if that will carry over into next week.

Hurricane Delta continues to pose a real threat to energy supplies as its path charts a direct hit to major production and refining centers. Not expected to make landfall until Friday morning, the National Hurricane Center has issued storm surge warnings along the US Gulf Coast, particularly for parts of eastern Texas and Louisiana. We were unable to access federal data on production outages, though it looks like major refiners are staying open for now. Even without formal data, we can expect oil and gas production to remain suppressed at least through the weekend, adding support to the bullish trends in place this week.

In a note from Morgan Stanley sent to The GERM Report, the bank said it expected Brent crude oil to flutter around $45 per barrel in the coming year, a forecast that’s on par with its March estimate. Playing off the “peak oil” crowd, Morgan Stanley sees oil demand weakening over the long-term. Even if demand returns to pre-pandemic levels, “the future trend rate of growth is likely to be lower, probably sharply,” the note read.

OPEC in its world outlook for the year, however, expects demand to increase at least through 2025, particularly as the global economy leaves the pandemic behind. Demand for 2020, however, is down by more than 10 million barrels per day from the 2019 forecast and by 2 million bpd for 2025. Estimates for global growth in the third quarter are high. The GDPNow forecast from the Federal Reserve Bank of Atlanta, updated Monday, finds Q3 growth at 35.3%, up by nearly a full percentage point from its estimate last week. While 35.3% growth looks stunning on paper, the optimism should be tempered given the deep contractions from early in the year. Speaking on the release of the annual report, OPEC Secretary General Mohammed Barkindo warned “The recovery will always be slower than the shock.”

US President Donald Trump spent much of the morning touting the prospects of a stand-alone bill that would put another $1,200 in the bank accounts of US taxpayers and help bailout an airline sector hammered by the pandemic. US Federal Reserve officials have said their running out of tools to prop up the economy as interest rates stay near zero. That means its largely up to US lawmakers to act. We continue to believe a stimulus bill would be detrimental to the Democrats in the battle over the narrative. If a deal doesn’t materialize, it will be painted as the fault of the Democrats. If a deal does materialize, Trump will claim yet another economic victory. Either way, we feel, it’s a win-win for the president. That said, we see trouble ahead in the US vote. Trump, who perhaps jokingly hinted he was eligible for a third term in office, is mounting a charge on the basic foundations of US democracy. The Justice Department, largely seen as in the president’s pocket, said it would allow prosecutors to investigate election fraud before votes are counted. With Trump hoping to stack the nation’s highest court in his favor, we wonder if the outcome will be decided this year given the chance for a protracted legal fight. That is a black mark on the US economy given the potential damage to investor confidence.

On the other side of the Atlantic, the prospects are less politicized but bleak nonetheless. The Bank of England warned the messy divorce agreement from the European Union was not net-positive for the British economy. There have already been warnings of billions of dollars, at least, leaving the United Kingdom. The BoE said the road ahead was guaranteed to be rough.

“Some market volatility and disruption to financial services, particularly to EU-based clients, could arise,” it said.

In commodities across the Atlantic, we could see a protracted supply-side squeeze if labor disputes in Norway drag on. It’s been about even steven so far in terms of production outages, with the sidelined barrels about the same as production increases year-on-year. Now, however, the strike threatens to close one of Norway’s largest fields, the giant Johan Sverdrup field. If the strike drags on, Norwegian energy major Equinor stated, the Johan Sverdrup field could close “until further notice.” The Norwegian Oil and Gas Association estimates daily production could drop by close to a million barrels of oil equivalent per day if the strike extends beyond Oct. 14.

For geopolitical issues, we continue to see the Arab pivot to Israel as a destabilizing factor. The normalization of ties with Israel leaves the Palestinian cause abandoned and the US diplomatic push is chock full of military favors. We noted before that according to international relations theory, a system where the lines between friend and foe are blurry is prone to minor, but possibly protracted, conflicts. A system where those lines are clear, however, is prone to all-out war. The latter scenario is how we view the Arab pivot. And it could blow up in Washington’s face. Qatar, part of the US effort to contain Iran, wants to buy the stealth F-35 from US defense contractor Lockheed Martin. Such a weapon in the hands of an Arab nation would be certain to frustrate Israel, which is keen to maintain a strategic advantage in the region, and actual spoil any chance at regional détente.