The GERM Report

Risk level: Yellow

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

THE BOOSTER SHOT

-On oil or on the economy, politicians say what you want to hear.

-Is a Blue Wave coming to the United States?

It was a volatile week, with Brexit concerns and renewed lockdowns across major economies casting a sour tone over the market. There was no lack of fireworks in the United States, and we were reminded Friday of the gruesome reality that terrorism remains a threat when a middle-school teacher was beheaded in a Paris suburb. Intraday movements were a case study in oscillation, though take a few steps back and the market doesn’t look to be doing much. OPEC, meanwhile, continues to have a supply problem, though most major market-movers will be silenced by the US political circus.

British and European negotiators may try one more time to settle their differences in what has already proved to be a messy divorce agreement. On the surface, it seems that whatever happens will be net-negative for the British economy. The US economy, meanwhile, is sputtering out. Day-to-day, it looked like a bouncy ride for the price of oil, though the market barely moved on the week. The price for Brent crude oil finished up just 0.19% to end trading Friday at $42.93 per barrel.

Brent crude oil looks stuck between $43 something and $41 something per barrel, a band that’s been in place more or less since the middle of September. Late-week trade patterns, however, showed a hint of a descending triangle, so we may see something a breakout in either direction in the coming week.

For 2021, you can pretty much bet that demand will return, but growth is a relative concept given the profound damage to the global economy caused by the pandemic. European cases have topped those in the United States in recent days, though many US states continue to shatter records in their daily numbers. It seems US President Donald Trump learned nothing from his bout with COVID-19, so we wonder how long Europe will remain in the lead. In its latest assessment on the future, the International Energy Agency said it was standing pat in its demand forecast for both this year and 2021.

“However, a second wave of COVID-19 cases and new movement restrictions are now slowing demand growth,” the monthly report for October read.

We wonder about the concept of relativism in the coming weeks and months. Daily headlines in the financial press focus on the possibility of a stimulus package in the US economy. That factor has been tossed in with the broth alongside strength or weakness in the US dollar as an issue that would explain market movements in one direction or the other. The odds of a stimulus emerging before the US election are slim, though something will develop one way or the other. We believe stimulus won’t materialize until January when the new term of whoever wins the US election begins. A Trump victory would almost certain to mean the US economy will be held hostage by a messianic president emboldened by a win. If he loses, he may try to burn the place down, though a President Biden and a potential Blue Wave means US taxpayers could see cash falling from the sky by mid-January.

On the energy sector, a report from S&P Global Platts sent to The GERM Report finds a Trump presidency would be business as usual, with more land and offshore open to drillers. Perhaps hinting at a moratorium in the Atlantic crafted by former President Barack Obama, Trump on the campaign trail pledged that Maine would have a say over what happens in its territorial waters. Needing to pounce on something in the key swing states, he tried his hand at the same for Florida, though Florida voters would rather have their pristine waters over drilling revenue. The US military, meanwhile, has testing grounds off Florida so drilling there would be a detriment to national security. Meanwhile, auctions, both land and offshore, have seen lackluster interest under President Trump. Platts, however, finds that a Biden presidency would sideline as much as 1.1 million barrels of oil and 3.7 billion cubic feet per day by 2025 because of proposed restrictions on drilling. But would we need those barrels given the inevitable greening up? It’s hard to say by looking through a 2020 lens clouded by the pandemic.

On foreign policy, it’s likely that Biden would remain focused on containing China, but potentially bring Iran and Venezuela back into the international fold. With Venezuela’s crumbling infrastructure, sanctions at this point may be meaningless anyway. And it would be foolish to let Iran export fully again without some sort of written agreement on its nuclear ambitions. So let’s not get ahead of ourselves there. And Biden, despite what you may have read or heard, will not impose an all-out ban on fracking.

Even though it’s lots of fun to write about the expectations, let’s take a closer look at political rhetoric during an election campaign. Philosophers from Hegel to Hobbes have written at length about the power of the will to survive. For Hegel, it was a matter of personal identity. If I don’t continually seek out the things that verify my notion of reality, I in effect am committing a form of suicide. This means that I believe what I want to believe by necessity. Hobbes took it to the level of the sovereign entity, suggesting the survival of the state, embodied in a ruling elite, overrides all other concerns. The survival of constituents is less important than the survival of the state. With a social contract in place that secures most of the tacit needs of the people, the constituents are obliged to obey the sovereign. The economist Milton Friedman put a spin on that too by wondering why the super-rich like Andrew Carnegie, or even Bill Gates, put money toward social issues rather than support the value of their respective business. The collective answer there too is survival. If the super-rich look good, their businesses look good too.

On the campaign trail, a politician’s first and primary goal is to survive and that survival is determined through the election process. Trump knows what his base wants to hear so he says it incessantly. What he personally believes, drawing on Hobbes, is secondary to what keeps him in power. The same thing goes for Biden. Biden on the campaign trail says what he thinks his supporters want to hear, and his personal beliefs might not be relevant.

We may have a pretty good idea of the platform of each political candidate, but it’s cloaked in the narrative of survival. Case in point would be President George H. W. Bush’s promise of no new taxes. Or Roosevelt’s need to satisfy Congress and the US public about entering global wars. Or any number of promises that made the rounds on the campaign trail only to fade away after the election. Politicians tell the people what they want to hear and they do that to get elected. Just like the survey of public opinion matters little in a race that is decided by the Electoral College, we really don’t know what will happen in a future administration.

It’s going to be something of a more-of-the-same week in crude, with the market focused on US oil and products inventories, jobless claims and the campaign trail. Crude oil prices had little reaction to Chinese GDP figures this morning, perhaps waiting for the OPEC+ monitoring committee to set the mood. There’s a spattering of speeches on tap from Central Bank officials on the agenda. Elsewhere, we wonder about the usual suspects trying to exploit the US political circus with propaganda, from North Korean nuclear threats to Russian election meddling. We were right last week to bet that Brent would be stuck in a tunnel, but wrong on the degree of volatility. It does seem like the market may sit on its hands though, so we’re issuing a Yellow alert, thinking Brent will move by at least plus or minus 2% on the week.